A potential March rate hike by the Bank of Japan would mark not just a monetary adjustment, but a strategic response to currency pressure, diplomatic optics, and the fragile transition away from ultra-loose policy.
The Bank of Japan could raise interest rates as soon as March if the yen resumes its slide ahead of a planned summit between Tokyo and Washington, former board member Makoto Sakurai said, framing currency stability as a decisive factor in the central bank’s near-term calculus.
Prime Minister Sanae Takaichi is expected to visit Washington around the time the BOJ holds its next policy meeting on March 18–19 for talks with U.S. President Donald Trump. The convergence of diplomatic engagement and monetary deliberation heightens the sensitivity of exchange-rate movements in the coming weeks.
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Sakurai said Takaichi may seek the BOJ’s support in curbing excessive yen weakness, particularly after Washington conducted rate checks last month to prop up the Japanese currency — a signal, he said, of U.S. preference for a stronger yen against the dollar.
“Currency intervention has only a temporary effect in combating yen-selling pressure. The best way to counter a weak yen is for the BOJ to raise interest rates,” Sakurai said in an interview. He added that he remains in close contact with current policymakers.
A currency problem with political consequences
The yen’s trajectory has become a domestic political issue. Since Takaichi, widely viewed as dovish on fiscal and monetary policy, took office in October, the currency has fallen about 8% against the dollar, touching an 18-month low of 159.45 in January. Although it later recovered, it remains near 155 per dollar, well below the levels prevailing before her administration began.
A weaker yen translates directly into higher prices for imported fuel and food, eroding margins for retailers and small businesses dependent on imported inputs. That will complicate the narrative that inflation is being managed in a stable and sustainable manner.
Japan’s inflation has exceeded the BOJ’s 2% target for nearly four years. While part of that rise has been driven by global energy and commodity shocks, currency depreciation amplifies imported price pressures. Sakurai noted that a renewed yen slide would push up import costs and offset the dampening effect of government fuel subsidies.
The wage backdrop and policy timing
The BOJ’s policy deliberations will unfold against the backdrop of Japan’s annual spring wage negotiations — the “shunto” talks between major companies and labor unions. Strong wage settlements would strengthen the case that inflation is becoming more demand-driven rather than purely cost-push, providing cover for further tightening.
Sakurai said that if the need to combat a sharp yen fall becomes urgent, the BOJ could justify a March hike by pointing to prospects for robust wage growth.
“It would make better sense to wait until April but depending on yen moves, there’s a chance the BOJ could raise rates in March,” he said.
The March 18–19 meeting precedes the April 27–28 gathering, when the BOJ will release updated quarterly growth and inflation forecasts. Traditionally, major policy adjustments are accompanied by revised projections. Moving in March would signal that currency dynamics, rather than forecast revisions alone, are driving the decision.
Markets already expect tightening. A majority of economists surveyed by Reuters anticipate rates rising to 1% by the end of June. Market pricing implies roughly a 70% chance of a hike by April. A March move would accelerate that timeline and underscore the central bank’s responsiveness to exchange-rate volatility.
From ultra-loose to normalization
The BOJ formally ended its decade-long massive stimulus programme in 2024, dismantling a framework that had relied on huge asset purchases and yield curve control — a regime introduced during Sakurai’s tenure from 2016 to 2021. In December, it raised its short-term policy rate to 0.75%, the highest level in 30 years.
Governor Kazuo Ueda has signaled readiness to continue raising rates if economic projections materialize. But the pace of normalization remains contested. Japan’s economy, while resilient, is not immune to global headwinds, including slower growth in major export markets and shifts in global capital flows driven by U.S. monetary policy.
Sakurai said the BOJ may ultimately need to lift rates twice in 2026 and twice again in 2027 to bring the policy rate from 0.75% to around 1.75% — a level he described as neutral, neither stimulating nor cooling the economy.
That trajectory would represent a profound shift for a country that spent years battling deflation and stagnant growth. Yet he warned that hiking too quickly carries risks. Faster tightening could increase bankruptcies among small firms and strain regional banks whose balance sheets are heavily exposed to low-yield assets accumulated during the ultra-loose era.
However, the potential alignment of a rate decision with a high-level summit adds another dimension. A persistently weak yen ahead of talks with Trump could invite scrutiny of Japan’s currency management. Conversely, a firmer yen supported by higher domestic rates could ease diplomatic tension and demonstrate policy alignment.
The message for markets is that exchange rates are no longer a peripheral consideration in Japan’s monetary framework. They are central to it. If the yen resumes its slide, the BOJ may conclude that the costs — higher import prices, political pressure, and diplomatic friction — outweigh the benefits of waiting for additional data.
A March hike would therefore signal more than confidence in inflation dynamics. It would mark the BOJ’s willingness to use interest rates as its primary defense against currency instability, reinforcing the shift from experimental stimulus toward a more conventional, though still cautious, normalization path.