The BOJ’s shift in stance on the exchange rate stems from Japan facing an imported inflation shock. Since the outbreak of the U.S.–Iran conflict in late February, Brent crude oil prices have surged by more than 50%, while the yen has weakened toward the 160 level against the U.S. dollar. For a country that relies on imports for around 90% of its energy, this represents an economic shock.

Although the BOJ kept interest rates unchanged in March, it maintained a tightening bias, which helped support the yen and prevented it from breaking above 160 during the press conference. However, longer-term risks continue to build, and the short-term impact of Middle East tensions on Japan’s economy and inflation remains difficult to assess.

A more challenging issue is that the BOJ has traditionally focused on “underlying inflation,” attempting to exclude temporary factors. However, new data released on March 26 showed that Japan’s consumer prices rose 2.2% year-over-year in February after excluding special factors — exceeding the BOJ’s 2% inflation target. At the same time, revised output gap estimates indicate that Japan has been operating in a state of excess demand since the first quarter of 2022, suggesting stronger inflationary pressure than previously expected.

How Likely Is an April Rate Hike?

Ueda’s remarks have significantly increased market expectations for a rate hike in April. He explicitly stated that the BOJ will continue to raise rates if its economic outlook materializes. He also noted that Japan’s economy is likely to grow above its potential level, with underlying inflation gradually accelerating.

This view is supported by the summary of opinions from the March policy meeting. One board member warned that the BOJ risks “falling behind the curve,” while another emphasized that despite uncertainties from rising oil prices, the central bank should focus on second-round effects and rising inflation expectations.

Although Ueda acknowledged that higher oil prices could have two opposing effects — either boosting inflation expectations or suppressing demand through reduced purchasing power — the market is currently leaning toward the former. With oil prices remaining elevated and downward pressure on the yen persisting, expectations are building that the BOJ is laying the groundwork for a rate hike at its April 27–28 policy meeting.

Ueda’s hawkish tone has provided support for the yen. During early Asian trading on March 30, the USD/JPY exchange rate held within the 158–159 range, temporarily stabilizing below the 160 level. If the BOJ proceeds with a rate hike in April, the narrowing interest rate differential between the U.S. and Japan could further strengthen the yen.

However, the outlook for Japan’s equity market is more complex. Goldman Sachs has recently lowered its 12-month target for the TOPIX index, citing rising oil prices as a drag on corporate profits. Meanwhile, the Nikkei 225 index has fallen more than 15% since late February, reflecting the combined pressure of surging energy costs and tightening monetary policy.

Overall, Japan now faces a delicate balance between inflation control, currency stability, and economic growth, with the BOJ’s next move likely to play a decisive role in shaping market direction.