The yen temporarily stabilizes and Japanese stocks weaken after the March central bank meeting; oil prices fluctuate at high levels under the baseline scenario, and the market shifts from “inflation” trades to “stagnation” expectations — 0401 Macro Update

The Bank of Japan maintained its policy rate unchanged at the March meeting, but conveyed to the market that it will proceed with rate hikes even amid heightened tensions in the Middle East, without specifying the timing of the next hike. The yen did not depreciate further before or after the meeting, possibly due to the effectiveness of warnings from financial officials. Japanese stocks weakened during the statement release and the press conference.

In the baseline scenario, if the conflict de-escalates or subsides, oil prices are expected to remain elevated in the range of $90-120 per barrel. With the U.S. job market cooling, cost inflation rising, and supply chain pressures emerging, “stagnation” may gradually outweigh “inflation.” Expectations for rate cuts overseas have tightened rapidly, even turning to potential hikes, while domestic policy remains focused on stability.

Due to the escalation of conflict among the U.S., Iran, and Israel, reduced risk appetite, and the bond market becoming less sensitive to "inflation," both short- and long-end yields in the Chinese bond market have declined. The market, once driven by inflation concerns pushing rates higher, has returned to rational trading on inflation and corrected its sentiment. Going forward, the focus may shift towards expectations of "stagnation" trades.