The Bank of Japan has kept its main policy rate at 0.5%, which matches expectations. The vote was 7–2, with Takata and Tamura pushing for a rate increase. Takata noted a shift away from deflation, hitting the 2% price stability goal. Tamura pointed out that inflation risks are increasing, indicating the need to adjust the policy rate toward neutral. The economy is gradually recovering but still has some weak spots. Exports and output are steady, capital spending is trending upward, and private consumption remains strong. Inflation expectations have risen a bit. Growth might slow down due to global trade policies but could pick up later. We expect underlying inflation to stagnate during this slowdown, then slowly rise afterward.

Asset Sales Announced

The Bank of Japan will start selling its ETF and J-REIT holdings, with this decision being unanimous. These sales will follow established disposal guidelines. More details from Governor Ueda will be shared at a conference set for 0630 GMT / 0230 US Eastern time. Recent talks have highlighted the likelihood of keeping interest rates steady amid global economic pressures, with a rate hike not anticipated until January 2026. There is a notable shift towards a more aggressive stance at the Bank of Japan, even with the current decision to hold rates. The two votes against the rate hike signal growing internal momentum for tighter policy. This suggests an increase could happen sooner than the market has anticipated. This policy change is backed by persistent high inflation. With core inflation steady above 2.5% for over a year, the dissenters’ claim that the price target has been met is gaining support, following the landmark ‘shunto’ wage negotiations in 2024 and 2025, which resulted in the highest pay increases in over thirty years.

Impact on Currency and Markets

The immediate and logical response is a stronger yen, and we expect this trend to continue. After years of weakness that saw the USD/JPY exceed historic highs in 2023 and 2024, the situation is changing. Traders might consider buying put options on the USD/JPY pair to capitalize on further declines toward the 140 level in the coming weeks. For equity markets, this poses a challenge for the Nikkei 225. A stronger yen will hurt profits of Japan’s leading exporters, and starting ETF sales removes a significant price-insensitive buyer from the market. We suggest buying put options on the Nikkei as a smart way to hedge against or profit from a potential downturn. The unanimous decision to sell ETFs and J-REITs signals the beginning of genuine quantitative tightening. The central bank is starting to reduce a portfolio once valued at over ¥70 trillion, which will lower liquidity in the financial system. This move reinforces the bank’s commitment to normalizing policy. Given this outlook, we should expect higher Japanese government bond (JGB) yields. The possibility of a rate hike soon, combined with the end of extensive central bank support, will likely increase borrowing costs. We can prepare for this using interest rate derivatives that benefit from rising long-term yields. Create your live VT Markets account and start trading now.

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