【Yen Trend】Allianz Global Investors: Expects BOJ to Hold in March, Ueda Kazuo May Support Yen Through Retaining April Rate Hike Possibility + Hawkish Rhetoric

The Bank of Japan will hold its monetary policy meeting this week. Gregor M.A. Hirt, Chief Investment Officer of Allianz Multi-Asset Investment, stated that he expects the Bank of Japan to keep rates unchanged at the March meeting and not make significant adjustments. While the fundamental case for normalizing policy and further rate hikes remains solid, considering upcoming data releases and evolving geopolitical risks, the central bank may adopt a wait-and-see approach.

Hirt said the key issue is whether Governor Ueda will provide guidance on a rate hike in April during the press conference. Recent comments seem to indicate increasing confidence among officials regarding this move, especially given the yen’s weakness, with USD/JPY testing the psychological level of 160 again. To prevent further yen depreciation, the Bank of Japan may need to raise rates early to stabilize the exchange rate.

However, two major obstacles could cause hesitation among policymakers.

First is geopolitical risks. Conflicts related to Iran pose real stagflation risks: sharp rises in energy prices could hamper economic growth and real incomes, making the Bank of Japan cautious about tightening policy amid slowing growth. Therefore, markets will closely watch how the BOJ balances inflation and economic growth amid potential energy shocks.

Second, important data for March are still pending. The final results of the “Shunto” wage negotiations and key price adjustments by Japanese companies in the new fiscal year are not yet fully clear. Since the BOJ may have enough information by the April meeting, it might be reluctant to provide clear guidance too early in March.

As a result, the expectation is that the BOJ will retain policy flexibility. Ueda may keep open the possibility of a rate hike in April and support the yen with hawkish rhetoric. Nonetheless, he might also emphasize that policy will depend on data performance, leaving room for maneuver if external shocks occur.

Hirt stated that in this environment, he remains optimistic about the outlook for Japanese equities. Although risks from escalating Middle East tensions also impact Japanese stocks, the structural drivers remain solid. He holds a neutral stance on the yen. Currently, short-term resistance from rising energy prices is pressuring the yen and benefiting the dollar. Despite strong reasons for the yen to strengthen mid-term, he prefers to adopt a wait-and-see approach until short-term factors subside.

Finally, he continues to maintain a long-standing bearish view on Japanese government bonds. Although markets have priced in multiple rate hikes and the appointment of Sanae Tanaka as Prime Minister is reflected in prices, inflation risks from rising energy prices and unclear fiscal policies mean he is not considering adjusting his underweight position for now.