Nikkei 225 Dips Below 60,000 as Bank of Japan Holds Rates in Split Vote

The Nikkei 225 Index surrendered the psychologically important 60,000 level today, closing down 1.02% at 59,917.46 after the Bank of Japan kept its policy rate steady at 0.75% while sharply raising inflation forecasts and cutting growth expectations amid escalating Middle East tensions.

Japan’s benchmark index pulled back from the record close above 60,500, with the sell-off accelerating after the central bank’s policy announcement. Whilst the Nikkei pulled back today on the news, the index remains a global outperformer with gains of 15.6% year-to-date and 67% over the past twelve months. Many have been looking at Japanese ETFs as an alternative entry for exposure, with funds such as the HJPN delivering strong results.

The benchmark 10-year Japanese government bond yield hit 2.496% in the past couple of weeks, the highest level since 1997, as markets adjust to tightening financial conditions and market expectations for further policy normalization. The yen strengthened modestly following the decision as currency markets interpreted the outcome as incrementally hawkish.

Details of the BoJ Decision

The Bank of Japan’s Monetary Policy Committee voted 6-3 to maintain the policy rate at 0.75%, in line with expectations from Reuters-polled analysts. However, the three dissenting votes, up from just one dissenter in March, called for an immediate increase to 1.0%, arguing that geopolitical tensions in the Middle East had skewed price risks to the upside.

In its quarterly Outlook Report, the central bank delivered a stark revision to its economic projections. The BoJ slashed its growth forecast for fiscal year 2026 to 0.5% from 1.0%, while sharply raising its core inflation outlook to 2.8% from 1.9%. The adjustments reflect growing concern that higher crude oil prices stemming from the Iran conflict will crimp corporate profits and real household incomes “through factors such as a deterioration in the terms of trade.”

Japan narrowly avoided a technical recession in the final quarter of 2025, with GDP growing a revised 0.3% quarter-on-quarter and 1.3% year-on-year. Headline inflation accelerated to 1.5% in March from 1.3% in February, marking the first increase in five months but remaining below the central bank’s 2% target for a second consecutive month. The so-called “core-core” inflation rate, which excludes both fresh food and energy prices, dipped to 2.4% from February’s 2.5%, its lowest reading since October 2024.

The Japanese government has responded to energy price pressures by scrapping taxes on gasoline and introducing subsidies to cushion consumers, though the BoJ warned that these measures may not fully offset the terms-of-trade shock from elevated oil prices.

Outlook

The hawkish undertones of Tuesday’s decision have raised expectations that the Bank of Japan could move to 1.0% at its June meeting or later in 2026, particularly if inflation remains persistently above target. The central bank’s statement emphasized it would remain vigilant against inflation “deviating upward,” signaling increased sensitivity to price pressures even as growth forecasts deteriorate.

The mix of higher inflation forecasts and downgraded growth projections continues to raise concerns around stagflation, a scenario where rising prices coincide with economic stagnation. However, bulls argue that sustained inflation near or above 2% represents a positive structural shift after decades of deflation, supporting nominal GDP growth and corporate pricing power.

Foreign investors have been significant buyers of Japanese equities over the past year, attracted by improved corporate governance, share buybacks, and the diversification appeal of Japan relative to U.S. and Chinese markets.

While the hawkish split vote and revised forecasts suggest tighter financial conditions ahead, Japan’s policy rates remain accommodative by global standards, and the structural case for Japanese shares has not fundamentally changed.