According to APP, economists at Daiwa Securities pointed out that due to geopolitical uncertainties, market expectations for an immediate interest rate hike by the Bank of Japan (BOJ ) have significantly decreased, making it easier for the BOJ to explain its decision to maintain interest rates unchanged. Currently, the overnight index swap market projects a 26% probability of a BOJ rate hike in April, compared to approximately 60% last week. The Japanese economy has, to some extent, withstood the adverse effects of deteriorating terms of trade. Current monetary policy is at a stage requiring comprehensive consideration and careful examination of potential inflationary trends and the impact of external shocks.

Economists at Daiwa Securities further analyzed that the prolonged geopolitical risks have led to increased market volatility, directly weakening investors' bets on an interest rate hike at the April meeting. This decline in expectations is not due to a significant deterioration in the fundamentals of the Japanese economy, but rather external uncertainties have dominated short-term pricing logic. The Japanese economy has shown some resilience, partially offsetting the pressure from deteriorating terms of trade, particularly maintaining relative stability in export-oriented industries and domestic consumption. However, fluctuations in oil prices and potential supply chain disruptions still pose imported inflation risks, forcing policymakers to adopt a more cautious approach.

Latest market data shows that the Bank of Japan's current policy rate remains at 0.75%, with the next monetary policy meeting scheduled for April 27-28. Against this backdrop, overnight index swap market pricing changes clearly reflect investors' increased sensitivity to external shocks. If the probability of a rate hike remains low, the Bank of Japan will have greater policy flexibility, avoiding hasty tightening of monetary conditions when information is insufficient, thus allowing room for further data observation.

The table below provides a visual comparison of the latest changes in the overnight index swap market's expectations for an April rate hike:

At a deeper level, this adjustment in expectations highlights the "data-dependent" nature of monetary policy at the current stage. The Bank of Japan needs to simultaneously weigh the sustainability of the domestic wage-price cycle against the transmission path of external shocks. If geopolitical risks are difficult to alleviate in the short term, maintaining the status quo will help stabilize financial market expectations and avoid premature tightening that could further drag down the fragile recovery. Meanwhile, the resilience of the Japanese economy to deteriorating terms of trade also provides a buffer for policy, reflected in the relatively robust performance of corporate investment and the labor market.

Editor's Summary : Geopolitical uncertainty has become a key variable dominating short-term expectations for Japan's monetary policy. The significant decline in the probability of an April rate hike provides the Bank of Japan with clear policy interpretation space. The current interest rate level of 0.75%, combined with economic resilience, means that policymakers can take gradual adjustments after carefully assessing inflation trends and external shocks. Investors should pay close attention to the potential transmission effects of the April meeting's communication and subsequent geopolitical developments on the yen exchange rate and bond yields.