The Bank of Japan meets tomorrow, with the interest rate derivatives market pricing in only a 7% probability of a rate hike, making no change almost a certainty. However, the real underestimated risk is not the meeting itself—calculations by BCA Research show that after the unwinding of carry trades in August 2024, related positions have quietly been rebuilt to three times their size at that time; the approximately 300 basis points interest rate differential between the Federal Reserve and the Bank of Japan cannot be narrowed in the short term, and carry trades continue to accumulate. The last time only one-tenth of the positions were unwound, it triggered a 12% single-day drop in the Nikkei 225 and a 13% decline in the Nasdaq 100 over three weeks. What Kazuo Ueda says the day after tomorrow will not determine the size of this bomb, but only influence the length of its fuse.
Tomorrow (April 27), the Bank of Japan will initiate a two-day monetary policy meeting, with results to be announced the day after tomorrow (April 28).
Based on the pricing of interest rate derivatives, the market believes there is only a 7% probability that the Bank of Japan will raise interest rates this time.
Just two months ago, this figure was still at 60%. The Iran war changed everything — oil prices surged to $106, putting pressure on Japan's economy and effectively tying Kazuo Ueda's hands.
Maintaining the status quo is almost certain, but the focal points of this meeting extend far beyond just an interest rate decision.
The quarterly outlook and Ueda’s choice of wording are more worth watching than the interest rate decision itself.
The April meeting is when the Bank of Japan releases its quarterly outlook report, which contains much more information than a regular meeting. The baseline forecast in the previous report (January) projected 1.0% growth and 1.9% core inflation for the fiscal year 2026.
After the Iran war, these figures need adjustment. Growth forecasts are likely to be revised downward — the blockade of Hormuz directly impacts Japanese corporate profits and energy import costs; inflation forecasts face bidirectional pressures, with oil prices driving imported inflation while the war suppresses consumer demand. How these factors are balanced is the most noteworthy aspect of this report.
Another detail: this report will include forecasts for the fiscal year 2028 for the first time, providing the market with a longer-term reference for policy direction.
At the press conference the day after tomorrow, the key focus will be whether Kazuo Ueda retains the phrase "conditions are in place by June" or pushes the rate hike window further due to war-related uncertainties. After the March meeting, he specifically emphasized that "the transmission of exchange rate depreciation to inflation is stronger than before," while committee member Takata voted alone in favor of an immediate rate hike to 1%. The latest Reuters survey shows that two-thirds of economists expect the Bank of Japan to raise the policy rate to 1% by the end of June — the market is waiting for Ueda to confirm or break this expectation.
This week, Finance Minister Shigeki Katayama issued multiple warnings about taking "decisive action" and has already spoken with US Treasury Secretary Bessent. The communication framework between the two countries stems from the Japan-US Exchange Rate Agreement signed in September 2025. Signals regarding the defense of the yen are also embedded in the strength of Ueda’s remarks the day after tomorrow.
Two months into the Iran war, the window for the Bank of Japan to raise interest rates has essentially been shut.
At the end of February, the United States and Israel launched an attack on Iran, leading to a de facto blockade of the Strait of Hormuz. Brent crude oil surged from just over $70 to a peak of $126, and is currently trading near $106.
This blow struck Japan's weakest point. Japan is 100% dependent on energy imports, and the spike in oil prices directly drove up domestic inflation, while the uncertainty of external demand brought by the war put additional pressure on the economy.
The dilemma facing the Bank of Japan is not 'inflation is too high, so interest rates must be raised,' but rather 'inflation is rising, yet raising interest rates would exacerbate the situation.' The market has fully priced in this dilemma, reducing expectations of a rate hike from 60% to zero.
With a 300-basis-point interest rate differential, carry trade positions have quietly accumulated to triple their previous levels.
The Federal Reserve’s benchmark interest rate is 3.5%-3.75%, while the Bank of Japan’s rate is 0.75%, creating a differential of approximately 300 basis points. This structure will not disappear within a few months.
Analysts believe that due to inflation driven by rising oil prices, the Federal Reserve has almost no room to cut interest rates this year. CME Group's FedWatch tool shows a near-94% probability that the Fed will keep rates unchanged at this week’s policy meeting, with expectations for a rate cut this year now limited to one instance, likely after the third quarter. The Bank of Japan may raise rates by 25 basis points at most, but only after the situation stabilizes.
The logic of borrowing yen to invest in dollar-denominated assets will remain valid in the coming months.
According to BCA Research's estimates in February this year, the unwinding of carry trades in August 2024 only liquidated 10% to 15% of total positions; the remaining portion was rebuilt over the following six months, and the current scale is approximately three times what it was then.
Many people remember that unwinding event. The yen appreciated more than 6% in a week, and the Nikkei 225 plummeted 12% in a single day—the worst day since 1987. The Nasdaq 100 fell by 13% in less than a month. Global market capitalization evaporated by over $670 billion within a few trading days.
That is merely one-tenth of the total position.
JPMorgan predicts that the US dollar will reach 164 against the yen by the end of the year. Noriyuki Sasaki, Chief Strategist at Fukuoka Financial Group, forecasts 165, while BNP Paribas’ most conservative estimate is 160. This represents the consensus among institutions, not a minority view.
160 is the current consensus price, not the upper limit.
The foreign exchange market moves first; the Australian dollar against the yen sends signals, and technology stocks are the last to feel the pressure.
Analysts currently predict that after the statement is released the day after tomorrow, the foreign exchange market will move first. If Kazuo Ueda adopts a hawkish tone, the US dollar against the yen may briefly drop from 160 to around 157-158; if his tone is neutral or dovish, it is highly likely to remain above 160, giving yen short sellers a new window of relief.
However, changes in carry trade conditions often do not show up in the yen itself first but rather appear earlier in the movement of the Australian dollar against the yen. With the Australian dollar offering high interest rates and the yen low interest rates, fluctuations in the Australian dollar against the yen are more sensitive to changes in carry trade positions than those in the US dollar against the yen. Historically, rapid declines in the Australian dollar against the yen tend to precede pressures on global risk assets by 24 to 48 hours.
Technology stocks are at the end of this chain and also where positions are the heaviest. In August 2024, the appreciation of the yen triggered unwinding, causing the Nasdaq 100 to fall 13% in three weeks, and at that time, only one-tenth of the total position was unwound. The sequence—foreign exchange moves first, followed by easing in the Australian dollar against the yen, with technology stocks feeling the pressure last—has already played out once before.
The Japanese government can intervene at any time between 160 and 162, but such interventions target "excessive volatility" and cannot alter the interest rate differential structure of 300 basis points. Any yen bought through intervention will be reabsorbed, with the duration depending on how strong a forward-looking signal Kazuo Ueda can provide the day after tomorrow.
Looking further ahead, what truly determines the length of the fuse are these key events: the PCE inflation data on April 30, the non-farm payroll report in May, and the Federal Reserve’s interest rate decision meeting in June. Any surprise—whether it be a ceasefire signal, a sharp drop in employment, or a decline in inflation reigniting rate cut expectations—will lead to a repricing of the 300-basis-point interest rate differential within days, with the unwinding of carry trade positions occurring much faster than the market anticipates.
Kazuo Ueda is meeting tomorrow and speaking the day after tomorrow. But that bomb was neither planted by him nor can he defuse it.
Editor/Jayden