Bank of Japan meeting preview: No interest rate hike! Will the yen exchange rate break 160?

Investment Insights - The market generally believes that the Bank of Japan will remain inactive while releasing hawkish signals. If the expectation of an interest rate hike in April is reduced, the USD/JPY will break through the 160 level. On March 19, the Bank of Japan (BOJ) will announce its latest interest rate decision. The market widely expects that the interest rate will remain unchanged at 0.75%, with the focus on whether Governor Kazuo Ueda will hint at an interest rate hike in April. Due to the ongoing tensions in the Middle East leading to high oil prices, BOJ officials are highly vigilant about the upside risks of inflation, which may provide a basis for further interest rate hikes. However, on the other hand, if the situation worsens and impacts economic growth, it may reduce the likelihood of an interest rate hike. The overnight index swap market (OIS) indicates that the current market expects the probability of an interest rate hike by the Bank of Japan in April to be around 60%. 【Source: Tradingeconomics; Japan's interest rates over the past three years】 How will the yen exchange rate trend? Previously, the USD/JPY approached the 160 level, and is currently fluctuating around 159. Gregor Hirt, Global Chief Investment Officer at Allianz Global Investors, believes that Governor Kazuo Ueda is likely to maintain the possibility of an interest rate hike in April, supporting the yen through hawkish rhetoric. Mitsubishi UFJ Morgan Stanley points out that despite the tensions in the Middle East, the Bank of Japan may still raise interest rates at the April meeting. During periods of inflation, central bank policy must shift its focus from supporting short-term economic sentiment to anchoring inflation expectations to ensure medium- to long-term economic stability. DBS Bank does not believe that an interest rate hike in April is a foregone conclusion, stating that June-July provides a more suitable window. It notes that severe oil price shocks may bring stagflation risks, delaying the timing of further tightening. Analysts generally believe that if the hopes for an interest rate hike in April are dashed, the USD/JPY will break through the 160 level. "I originally expected the yen to depreciate to 165 by the end of the year, but it may now reach that level earlier," said Taro Sasaki, Chief Strategist at Fukuoka Financial Group. [Source: TradingView; USD/JPY trend over the past year]