Japan's policy shift towards a dovish stance, but the yen's risk limits the central bank's room to hold steady, says Bank of America

LootboxPhobia · 2026-02-28T16:41:56+00:00

Bank of America Global Research points out that Japan's policy is leaning dovish, and the risk of yen weakness limits the authorities' waiting time. Prime Minister Sanae Takashi expressed resistance to interest rate hikes, leading to yen depreciation and falling bond yields. Bank of America warns that continued depreciation could trigger political and financial risks, calling for policy normalization.

LootboxPhobia

2026-02-28 16:41:56

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Investing.com – Bank of America Global Research stated in a report that Japan’s policy environment is shifting towards a more dovish stance, but the risks surrounding a weak yen could limit the authorities’ ability to wait and see.

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Bank of America said that recent developments have reinforced market expectations that Prime Minister Sanae Yoshimura’s government leans toward a more accommodative monetary policy: a news report describing her meeting with Bank of Japan Governor Kazuo Ueda, and the nomination of two widely viewed dovish new members to the Bank of Japan Policy Board.

The Daily News reported that during her meeting with Ueda on February 16, Yoshimura expressed resistance to further rate hikes, which triggered a decline in the yen and Japanese government bond (JGB) yields, especially in the medium-term sector. Additionally, Tōichirō Asada and Ayano Sato were appointed as new members of the Bank of Japan Policy Board, leading to another sell-off of the yen and a steepening of the ultra-long JGB yield curve.

While these signals point to short-term yen weakness and a further steepening of the yield curve, Bank of America warned that allowing unchecked currency depreciation could pose political and financial risks. Public concerns about rising prices remain high, and persistent yen weakness could eventually push long-term yields higher, forcing the Bank of Japan to act.

The bank believes that relying solely on foreign exchange interventions to stabilize the yen while maintaining low interest rates is unrealistic, especially if delaying policy normalization is seen as the root cause of currency weakness.

Bank of America has raised its USD/JPY forecast range from 150-158 to 153-161, noting that further depreciation to 160 could reignite pressure on the Bank of Japan to tighten policy, even as the threshold for recent rate hikes has increased.

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