US-Iran Conflict Delays Bank of Japan Hike

Previously, markets priced in over a 70% probability of the BoJ exiting negative rates, driven by persistent domestic inflation and wage growth. However, the conflict triggered a global flight to safety, paradoxically strengthening the Japanese yen by 3.2% against the USD (from 148.50 to 143.80) and driving 10-year JGB yields down by 17 basis points to 0.58%.

Simultaneously, Brent crude prices surged 10.5% to $91.20/bbl. This creates a dilemma for the BoJ: a stronger yen dampens imported inflation, while higher oil prices suggest inflationary pressure.

Market-implied hike probabilities have plummeted to below 40%. Experts note the BoJ must weigh price stability against financial stability during extreme global volatility, potentially prioritizing the latter and delaying normalization.

This prolongs global monetary policy divergence, impacting capital flows and carry trades.