Japan’s national CPI excluding food and energy rose 2.4% year on year in March. This was down from 2.5% previously.
The recent drop in Japan’s core inflation to 2.4% suggests that price pressures may be peaking, slightly easing the urgency for the Bank of Japan to hike interest rates aggressively. We see this as a signal to pull back on bets for a rapid series of rate increases in the second quarter of 2026. This data point challenges the more hawkish sentiment that was building after the policy pivot we saw back in 2024.
Implications For Currency Strategy
For currency traders, this reinforces the appeal of the yen carry trade, where investors borrow in yen to invest in higher-yielding currencies. The interest rate gap with the U.S. is likely to remain wide, especially as the yen is currently trading near 160 to the dollar, a level not seen for decades. We should consider strategies that benefit from a weak or stable yen, such as selling out-of-the-money JPY call options against the dollar.
This environment is supportive for Japanese equities, so we should consider long positions on Nikkei 225 futures. A slower pace of rate hikes means corporate borrowing costs will not rise as fast as feared, which protects company profit margins that have already grown an average of 8% in the last reported quarter. Looking back at 2025, markets were far more nervous about the impact of rising rates on stocks, but that fear is now subsiding.
In the bond market, the slowing inflation figure implies that yields on Japanese Government Bonds (JGBs) may not climb as sharply as we previously modeled. The 10-year JGB yield, currently hovering around 1.1%, now seems less likely to push towards the 1.5% mark in the near term. This stability makes derivatives that bet on a contained yield range more attractive than outright short positions on JGB futures.
The latest “Shunto” spring wage negotiations also feed into this narrative, showing an average pay increase of around 4.6%. While this is historically strong and ensures real wage growth, it is a moderation from the landmark 5.2% hikes we saw in 2025. This cooldown in wage growth gives the central bank more breathing room to wait and see before its next policy move.
