Oil Prices Rise—Japan Inflation Re-Emerges! The Yen Weakens; The Finance Minister Vows to Defend Intervention

Japan’s core inflation in March rose for the first time in five months, driven mainly by higher energy prices sparked by geopolitical tensions. As inflationary pressure gradually becomes more visible, the market is closely watching the Bank of Japan’s upcoming rate-decision meeting. At present, most institutions expect the BOJ to keep interest rates unchanged, but it may release guidance that leans hawkish on monetary policy. At the same time, the yen exchange rate has remained weak, prompting the Japanese government to issue a high alert for speculative transactions. Japan’s Ministry of Finance has said clearly that if necessary, it will take intervention measures at any time to stabilize the currency market.

Energy prices push up Japan’s core inflation

According to CNBC, Japan’s core inflation rate excluding fresh food in March rose to 1.8% year over year, up from 1.6% in February. This is the first time the figure has accelerated in five months; the main reason is that the conflict in the Middle East has driven up energy prices. However, inflation excluding energy and food edged down slightly to 2.4%. Based on a Bank of Japan survey, more than 80% of respondents expect prices to rise in the future. BofA analysis said the impact of energy prices will be more pronounced in the summer, further boosting inflation expectations.

Should it raise rates? The Bank of Japan’s monetary policy faces a dilemma

With inflation heating up and the yen depreciating, the market expects the Bank of Japan to keep the benchmark interest rate at 0.75% at its April meeting. Citi believes that, given uncertainty in the Middle East situation, this decision will keep policy on hold, but the policy guidance may lean hawkish. Overnight index swap rates show that the probability of a rate hike in April has plummeted from 73% to 5%. In addition, rumors suggest the Bank of Japan will revise down its 2026 fiscal year economic growth forecast and raise its inflation expectations, highlighting the complexity of the macroeconomic environment.

The yen is weak; the finance minister vows to stand guard on intervention

In recent weeks, the yen has been hovering around the 160 level, prompting Japan’s Ministry of Finance to step up warnings about carry trades and speculative behavior. Finance Minister Kayama Sayuki said she has maintained close contact with the U.S. Treasury and has sufficient discretion to carry out potential currency market interventions. Although a weaker yen helps large exporters boost profits, it also raises import costs and weakens the purchasing power of ordinary households. If the Bank of Japan does not signal a near-term interest rate increase, the yen will face greater downside pressure, increasing the likelihood of official real intervention.

Last week, Kayama held a bilateral meeting in Washington with U.S. Treasury Secretary Bessent and said she is prepared to take bold action to support the yen. According to Bloomberg, in 2024 Japan used about $100 billion to intervene to support exchange rates. If Japan can receive assistance from the United States, the intervention actions would be more effective. Kayama did not give a direct response to whether she would again sell U.S. Treasuries to raise funds, but stressed that Japan remains the largest holder of U.S. Treasuries.

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