Bank of Japan flags deeply negative real rates as yen stays under pressure
Key points
- Bank of Japan (BOJ) Governor Kazuo Ueda said Thursday that Japan’s real interest rates remain “firmly below zero,” keeping financial conditions highly accommodative.
- Despite multiple rate hikes since 2024, the policy rate around 0.35% is still far below domestic inflation, which has hovered above 2% for more than two years.
- The wide rate gap with the United States continues to weigh on the yen and underpins the use of the currency for funding higher-yielding assets abroad.
Ueda underscores negative real rates, easy conditions
Ueda’s comments, delivered after the BOJ’s latest policy adjustments, confirmed that short- and medium-term real interest rates are still negative. He indicated that these low borrowing costs are supporting moderate growth in capital expenditure and keeping overall financial conditions relaxed across much of the Japanese economy.
The remarks reinforce the message that, while Japan has begun moving away from ultra-loose policy, the stance remains accommodative in real terms.
Market reaction and currency moves
Following Ueda’s comments, the dollar ticked higher against the yen, with USD/JPY last quoted around 158.73, up 0.10% on the day.
More broadly, the yield gap between Japan and the United States has helped push the dollar closer to 162.50 yen, near multi-decade highs. The still-low Japanese rates continue to underpin carry trades, where market participants borrow in yen to buy higher-yielding foreign assets.
Inflation stays above target
Fresh government data this week showed Japan’s core consumer price index, which excludes fresh food, rose 2.8% year-on-year in March 2026, according to the Statistics Bureau of Japan.
This marks more than two consecutive years with inflation running above the BOJ’s 2% target, underscoring how persistent price pressures have become after decades of deflationary tendencies.
Wage gains strengthen case for normalization
The latest inflation figures follow the conclusion of the annual “shunto” wage talks, which delivered an average pay rise of 4.1% at major firms, the biggest settlement in nearly 30 years.
Sustained wage gains have been a key precondition for the BOJ to consider stepping away from its emergency-era stimulus framework. Together with above-target inflation, they have provided cover for the central bank to begin cautiously normalizing policy.
Gradual tightening, but real rates still deeply negative
In March 2024, the BOJ raised rates for the first time in over a decade, ending its negative-rate regime and signalling a gradual shift away from ultra-loose policy. Since then, it has implemented two further modest rate moves, taking the overnight call rate target to around 0.35%.
Even so, with inflation running at 2.8%, the real policy rate remains deeply negative. This gap is at the core of Ueda’s assessment that conditions are still accommodative despite headline rate increases.
Background: years of aggressive easing
The BOJ’s current stance is rooted in a long period of extraordinary easing.
- Since 2013, the bank has pursued quantitative and qualitative easing, buying large amounts of government and corporate bonds to inject liquidity and push down yields.
- In 2016, it introduced negative interest rates and yield curve control on 10-year government bonds, aiming to spur borrowing and lift inflation expectations after years of subdued price growth.
This prolonged stimulus contributed to a sharp depreciation of the yen in 2022 and 2023, as other major central banks tightened policy more aggressively to combat surging inflation.
Global impact and what to watch next
Japan’s low-rate environment, even after recent hikes, continues to encourage capital outflows toward markets offering higher returns. The yen remains a key funding currency in global markets, shaping flows into riskier asset classes.
Market participants are now focused on whether the BOJ will:
- accelerate the pace of rate hikes,
- further adjust its approach to managing the yield curve, or
- step up verbal or direct measures to support the yen.
Any unexpected acceleration in tightening or stronger signals on currency support would mark a potential turning point for global funding conditions and could temper the long-running use of the yen as a low-cost source of capital.
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