BOJ split on hikes as oil-driven CPI rises to 2.8%

The Bank of Japan left its short-term policy rate at 0.75% following the April 27-28 meeting in Tokyo. Three of the nine board members broke from the majority and advocated near-term rate increases after officials raised the bank’s core consumer price index forecast for fiscal 2026 to 2.8%.

The policy summary showed differences among board members on timing and pace. One member called for immediate increases at upcoming meetings. Another proposed gradual rises every few months, contingent on incoming inflation data. The BOJ did not change the official rate at this meeting.

The bank cited higher energy costs tied to the conflict in the Middle East and a rise in oil prices when it updated the fiscal 2026 core CPI forecast to 2.8%, above the BOJ’s 2% target. Officials flagged concern that sustained higher inflation could affect households’ and firms’ inflation expectations and influence future policy choices.

Financial markets reacted to the hawkish tone. The yield on the 10-year Japanese government bond rose to a 29-year high after the meeting. Prediction markets show about a 65.8% probability of a 25 basis point increase at the next BOJ meeting on June 15-16, which would lift the policy rate to 1.0%.

Investors have used the yen as a funding currency for carry trades, borrowing in low-yielding yen to buy higher-yielding assets abroad. Each Japanese rate rise narrows the yield gap that underpins those trades, which can reduce their attractiveness and prompt unwind activity that affects US Treasuries, emerging-market equities and digital assets.

Higher Japanese policy rates tend to support a stronger yen and can reduce incentives for Japanese institutional investors to allocate more capital overseas. Market participants will watch the June 15-16 meeting for any decision to begin a sustained tightening cycle.