MUFG links Japan’s fiscal plans under PM Takaichi to a gradual path toward Bank of Japan (BoJ) policy normalisation. It says shifting away from supplementary budgets and toward investment-led spending could support this change.
MUFG expects the FY2026 budget to pass, with the government aiming to enact it by the end of the current fiscal year. It says that once the budget is approved and the details are confirmed, the chance of a BoJ rate increase could rise.
Fiscal Policy And Boj Normalisation
MUFG puts the probability of a rate rise at the 28 April meeting at about 70%. It adds that if the FY2026 budget passes by then and USD/JPY stays near current levels, pressure on the BoJ to act could increase.
The firm notes the government may name replacements next week for two BoJ Board members, Asahi Noguchi and Junko Nakagawa. It says both are viewed as dovish, and new appointments could change the balance of the Board.
MUFG also notes that nationwide CPI data on Friday was weaker than expected. It says this alone does not change the outlook for an April hike, but repeated weak readings could affect later decisions.
The government’s shift toward investment-led growth suggests a BoJ rate hike is becoming more likely, with the 28 April meeting a key date. We are watching for the FY2026 budget to pass before the end of March as a final trigger for the BoJ to move. This could create opportunities for traders in the weeks ahead.
Trading Implications For Yen Rates And Volatility
With USD/JPY still high near 152.50, a rate hike would likely be aimed at supporting the yen. We think traders may want to consider positions that benefit from a lower USD/JPY, using options or futures to capture a narrowing US-Japan interest rate gap. The possible replacement of two dovish BoJ board members could also support a more hawkish policy tilt.
We expect implied volatility in yen pairs to rise into late April. In 2025, policy changes often triggered sharp swings, which made long-volatility trades like straddles more appealing. A straddle can profit from a large move in either direction after the BoJ decision.
January inflation data also keeps pressure on the BoJ, with core CPI at 1.9% even though it was slightly below forecasts. A more important release will be the result of the “shunto” spring wage talks due in mid-March. If wage growth is strong—similar to the multi-decade highs seen in 2025—an April hike would look highly likely.
Outside FX, the most direct trade may be in Japanese government bonds (JGBs). A rate hike would tend to push yields up and bond prices down, which can support short positions in JGB futures. This would reflect markets continuing to move away from the era of ultra-loose monetary policy.
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