BoJ Meeting Preview: Balancing Act Between Growth and Inflation

Author: Kelvin Wong

Date: 18 March 2026

Key Takeaways

• Policy Stance: The Bank of Japan (BoJ) is expected to maintain its policy interest rate at 0.75% amid stagflation risks, balancing rising inflation against slowing economic growth due to elevated oil prices from the ongoing US-Iran conflict.
• Mixed Economic Signals: Despite a weak performance in equities, with the Nikkei 225 down approximately 9%, there are signs of improving wages and persistent inflation, suggesting a potential rate hike of 25 basis points in 2026.
• Yen Under Pressure: The USD/JPY exchange rate is currently near the intervention risk zone of 159.45–161.95, prompting caution in the markets. A drop below 157.50 could lead to USD weakness, while further yen depreciation raises the likelihood of official intervention.

Current Economic Context

The BoJ is likely to keep interest rates unchanged during its monetary policy meeting on 19 March 2026, as high oil prices, driven by the US-Iran conflict, contribute to stagflation risks in Japan. As a major net oil importer, Japan faces increased living costs, which could dampen consumer and business confidence, ultimately slowing economic growth.

Market Performance

The Nikkei 225 has been one of the worst-performing global indices, reflecting weak consumer confidence, having dropped 9% since the onset of the US-Iran war. This trend indicates a negative feedback loop affecting Japan's economy.

Wage Growth and Inflation

In a recent speech, BoJ Governor Ueda noted that underlying inflation is gradually moving towards the 2% target, with real wages rising for the first time in over a year, indicating a growth rate of 1.40% year-on-year as of January 2026. Large corporations are expected to offer wage increases of 5% or more following the annual spring wage negotiations.

Interest Rate Expectations

The interest rate swap market suggests that the BoJ may still consider a 25 basis point rate hike in 2026, with the 1-year overnight indexed swap rate showing slight increases, indicating market expectations for future tightening.

Focus on Upcoming Press Conference

Governor Ueda's press conference following the monetary policy decision will be closely watched, especially as the USD/JPY hovers around the key intervention risk zone. The yen has weakened significantly, nearing a 20-month low against the dollar, which may prompt intervention from Japanese authorities if the trend continues.

Market Speculation

Short-term speculators are advised to be cautious with aggressive yen short positions as the USD/JPY fluctuates around the intervention risk zone. A break below 157.50 could lead to a minor decline towards the next support level at 154.65.