Why the Yen's Three-Day Rally? BOJ Hawkish Despite No Rate Hike This Week?

Huitong Finance APP News — The USD/JPY exchange rate has become more volatile ahead of the Federal Reserve and Bank of Japan policy meetings. On Wednesday, March 18, the USD/JPY traded around 158.5-159.0, slightly retreating from previous days but still remaining above 158. The yen has strengthened for the third consecutive day, mainly due to market expectations of hawkish signals from the Bank of Japan’s policy meeting this week. Ongoing Middle East geopolitical tensions continue to push up oil prices, with increased tensions related to Iran raising supply concerns, leading to higher global energy costs and further amplifying Japan’s imported inflation pressures. As an economy highly dependent on Middle Eastern oil imports, rising oil prices directly boost core CPI expectations, reinforcing the need for the Bank of Japan to maintain normalization.

Direct Drivers of Yen Rebound

Recently, USD/JPY retreated from above 159 to the 158.6-158.9 range, with the yen’s gains mainly driven by bets on the Bank of Japan’s policy meeting. Markets expect the BOJ to keep short-term policy rates at 0.75% this time, but Governor Ueda Kazuo may strengthen rate hike prospects through forward guidance. Internal hawkish voices within the BOJ persist, with some board members emphasizing the need to address upside inflation risks first. Ueda has recently publicly stated that core inflation is gradually approaching the 2% target and is expected to stabilize around 2% from the second half of fiscal 2026 to 2027. He stressed that sustainable inflation requires wage growth, implying that if data supports, the BOJ may consider further rate hikes in April. Oil prices have surged due to Middle East conflicts, with Brent crude rising significantly, increasing Japan’s import costs and market speculation that the BOJ may accelerate exit from ultra-loose policies, supporting the yen.

External Geopolitical Risks and Energy Price Transmission

The escalation of Middle East tensions directly impacts Japan’s energy security. Japan’s crude oil imports are highly concentrated in the Middle East, and potential disruptions through the Strait of Hormuz keep oil prices prone to rises. Rising oil prices push up import price indices, potentially exceeding expectations for core CPI. The BOJ faces dual pressures of slowing growth and accelerating inflation. Current oil price volatility has widened the year-over-year increase in some import price indices, compounded by the yen’s previous weakness, strengthening imported inflation effects. This provides the BOJ with reasons to maintain a hawkish stance but also complicates economic slowdown risk assessments. Japanese Prime Minister Suga Sanae will meet with the U.S. President this week, balancing energy security and diplomatic considerations. Previously, former President Trump mentioned Japan’s participation in strait escort missions but later retracted, highlighting Tokyo’s cautious stance amid the U.S.-Japan alliance and energy dependence.

Export Data and Economic Fundamentals

Japan’s February exports increased by 4.2% year-over-year, beating market expectations of 1.6%, but significantly slowing from January’s 16.8%, marking the sixth consecutive month of positive growth. While export momentum remains positive, it has clearly weakened, mainly due to fluctuations in Asian demand and base effects. January’s high growth slowed in February to normal levels. Major export categories include automobiles, industrial equipment, and electronics, but rising global demand uncertainty raises doubts about future trends. The slowdown in exports reflects tightening global trade conditions but still provides some fundamental support for the yen, preventing excessive depreciation.

FAQs

Q1: Why does Middle East conflict support yen strength?

A: Japan relies heavily on Middle Eastern oil imports. Conflict-driven oil price increases directly amplify imported inflation pressures. The BOJ faces higher inflation risks, with market expectations of accelerated policy normalization, including stronger rate hike signals. This supports the yen against the dollar, despite rising short-term growth risks, as inflation priorities dominate forex pricing. Every 10% increase in oil prices could add roughly 0.3-0.5 percentage points to Japan’s core CPI.

Q2: What is the likelihood of a rate hike at this BOJ meeting? How will it affect the yen?

A: The market expects the BOJ to keep rates at 0.75% this time, but recent comments from Ueda emphasize inflation’s approach to 2% and consider data as a basis for hikes. The probability of a rate increase in April is estimated at 30%-40%. If the statement or press conference emphasizes a hawkish “data-dependent” stance, the yen could further rebound to 157-158; if inflation risks are downplayed, the yen may weaken back toward 160. Traders should watch Ueda’s post-meeting comments on wage-price dynamics and geopolitical risks.

Q3: What does the strong February export data imply for the medium-term yen trend?

A: Although the 4.2% growth exceeded expectations, it slowed sharply from January’s 16.8%, indicating diminishing export momentum. Global demand uncertainty and base effects are at play; currently, the yen’s rebound is driven mainly by policy expectations and oil inflation, not exports per se. In the medium term, if the BOJ remains hawkish and oil prices stay high, the yen could gradually recover from previous overselling. Conversely, easing geopolitical tensions or worsening global growth could deepen export weakness and pressure the yen downward. Traders should monitor upcoming trade data and oil price movements.

(Edited by: Wang Zhiqiang HF013)