The Bank of Japan (BoJ) will likely keep its policy rate at 0.75%. The focus is on economic growth, inflation trends, and the yen’s impact, not on political issues. Japanese government bond yields and financial conditions are also being monitored, with a particular emphasis on short-term bonds. The BoJ might increase its GDP forecast while addressing trade tensions with China and geopolitical risks. Governor Ueda is not expected to hint at more rate hikes but will likely emphasize how domestic inflation is related to the weak yen. For Japanese government bonds (JGB), rates will be determined by the market, with tools ready if needed.

Ministry Of Finance Bond Issuance

The Ministry of Finance can change bond issuance, focusing on shorter-term bonds as outlined in this year’s budget plan. Although changes in the pace of JGB purchases are unlikely, short-term bonds remain a priority. This is closely tied to mortgages, consumer loans, and corporate credit. Mortgage rates range between 2.5% and 5%, which affects the economy. The yen’s influence on rate decisions is recognized, but quick rate hikes could slow recovery. It’s important to monitor how financial conditions affect growth and inflation. Inflation is expected to decrease in early 2026, suggesting that the BoJ’s current approach will stay the same. With the BoJ likely to keep its policy rate at 0.75% tomorrow, the yen may weaken further. The large interest rate gap with the U.S., where the Federal Reserve’s rate is around 4.5%, continues to encourage carry trades against the yen. Because of this, the currency remains vulnerable, currently trading around 155 against the dollar. Governor Ueda is not expected to indicate any more rate hikes. This should lower uncertainty and could reduce currency volatility in the coming weeks. Previously, implied volatility increased ahead of two rate hikes in 2025, but the current situation suggests a period of stability. In this environment, strategies like selling out-of-the-money JPY call options become attractive, allowing traders to benefit from the weak yen and falling volatility.

Japanese Government Bond Market Shifts

We are also observing changes in the Japanese government bond market and the yield curve. Shifting bond issuance towards shorter-term debt could stabilize front-end yields while allowing longer-term yields, such as the 10-year, which is currently around 1.1%, to rise. This scenario could make trades anticipating a steepening yield curve favorable. The expectation that inflation will significantly ease in the first quarter of this year supports the idea of a patient central bank. Japan’s core inflation, which peaked at 2.8% in late 2025, has already decreased to 2.5%, reinforcing the notion that the BoJ does not need to tighten its policy anytime soon. This indicates that any potential strengthening of the yen in the coming weeks may be temporary and could represent a selling opportunity. Create your live VT Markets account and start trading now.

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