#BOJAnnouncesMarchPolicy

BOJ Waited in March, Market Pricing in October: Japan’s Interest Rate Normalization Redraws Global Liquidity

The Bank of Japan (BOJ) kept its policy rate unchanged at 0.50% at its March meeting. This was no surprise; all 64 economists surveyed by Reuters expected this decision. However, the “wait” decision is not passivity. As the BOJ moves towards interest rate normalization after decades of ultra-loose monetary policy, it is weighing both the domestic wage-inflation cycle and the uncertainty surrounding tariffs and wars. And the outcome of this weighing affects not only Tokyo but also global capital flows.

Background to the March Decision: “Don’t Rush, But Don’t Hold Back Either”
The BOJ raised interest rates to 0.50% in January, reaching a 30-year high. Since then, inflation has been above its 2% target for over three years, food prices (especially rice) are stubbornly rising, and wage growth is projected to reach 5.25% in 2024. Governor Kazuo Ueda's message is clear: "We will continue to raise interest rates if the economy continues its recovery."

However, Vice Governor Ryozo Himino reminds us to apply the brakes, saying "global uncertainty remains high." US tariffs on Japan (up to 25% on automobiles and 24% on general merchandise) and the war in the Middle East affecting oil prices are putting the BOJ in a dilemma of "acting too early, acting too late."

Market Calendar: October, Not June
60% of economists predict the next increase will reach 1.00% by the end of June. However, recent polls show a shift in weight: a majority of 63% now expect at least a 25 basis point increase in the fourth quarter (October-December), with October being the strongest candidate at 38%.

Why October? Because that month the BOJ releases its quarterly outlook report and holds its branch managers' meeting—meaning wage and inflation data will be on the table. At the September meeting, 2 of the 9 members (Hajime Takata, Naoki Tamura) already filed dissenting opinions against the 0.75% increase. The "hawkish wing" within the Board is expanding.

Japanese Economy: "Virtuous Cycle" Tested
The BOJ's entire strategy is based on the "wage-price virtuous cycle." Growth is expected to slow to 1.4% in 2025, unemployment to rise to 4.5%, but the cycle is calculated to continue if wage increases remain around 5%.

The risks are twofold: A tight labor market pushes wages up, while US tariffs and slowing global growth put pressure on corporate profits. This is Himino's warning: "The impact of tariffs may be greater than expected."

Impact on the World Economy: Yen, Carry Trade, and Liquidity
Why are the BOJ's actions global? For three reasons:

1. The End of the Yen and Carry Trade: The yen has depreciated by more than 6% against the dollar in the last 6 months. If the BOJ raises interest rates, the yen will strengthen, unraveling the "carry trade" of borrowing cheap yen and parking it in high-yield assets for decades. This means capital outflow from emerging markets and global volatility.

2. The Gap with the Fed: While markets expect the Fed to cut rates in September, a BOJ rate hike would narrow the US-Japan interest rate spread. This would mean a weakening dollar and repricing of commodity prices.

3. Bond Market: The BOJ has signaled a balance sheet reduction and the sale of ETF/J-REIT assets. Japan has the world's largest bond holdings. If the BOJ reduces purchases, global bond yields will see upward pressure—this will also affect US and European borrowing costs.

Analysis: The Price of "Slow Normalization"
The BOJ is cautious. Because Japan has just emerged from deflation and paid the price for the mistake of "early tightening" in the 2000s. However, inflation is sticky, prices for more than 20,000 food items have increased this year, and companies continue to pass on costs to prices.

The market is now pricing in a BOJ that is no longer in a "wait-and-see" mode, but rather a "raise if data comes in" mode. The median expectation is 0.75% in October, 1.25% at the beginning of 2027, and 1.50% at the beginning of 2028. This means that for the first time in decades, Japan will be acting like a "normal central bank."

The BOJ didn't change interest rates in March, but it confirmed a path that will change the world. The direction of the yen, the fate of carry trade, and the amount of global liquidity now depend on Tokyo's decisions. And when Tokyo says "we are not rushing," it is actually saying "we are not turning back."