BOJ Eyes Possible June Hike as Middle East Tensions Push Prices

The Bank of Japan’s policy summary published May 12 said board members are considering a rate increase as soon as June 2026. The central bank’s policy rate is 0.75%, a level reached after a gradual exit from negative rates that began in 2024.

The summary identified rising energy and commodity costs linked to tensions between Iran and Israel as a source of inflation risk. The BOJ’s inflation forecast for fiscal year 2026 is 2.8%, above its 2% target, and the summary noted much of the uptick reflects commodity price shocks rather than stronger domestic demand.

Opinions among board members diverged. Some argued a preemptive rate rise could be appropriate despite economic uncertainty; others urged weighing risks to growth before tightening policy.

By April 20, market-implied odds of a June rate increase had climbed to about 74%. After the policy summary was released, Japanese government bond yields rose to a 29-year high. The yen strengthened and Japanese equities fell as markets adjusted to the prospect of tighter monetary conditions.

Higher Japanese rates reduce the profitability of the yen carry trade, where investors borrow in yen to invest in higher-yielding assets overseas. Past episodes of BOJ tightening have coincided with unwinding of carry trades and with declines in bitcoin and other lower-liquidity digital tokens. During such periods, some investors moved into stablecoins or adopted hedging strategies.

The BOJ’s tightening has progressed gradually since 2024. Market participants are monitoring upcoming BOJ communications and economic data for clearer signals on the timing and scale of any future rate changes.