Bank of Japan Interest Rate Decision: Implications for Short-Term Rates and Indian Stock Market

Bank of Japan Interest Rate Decision Looms Amid US-Iran Conflict and Energy Crisis

The Bank of Japan (BoJ) is set to announce its policy decision on Tuesday, April 28, amidst a backdrop of rising crude oil prices and heightened risks of inflation flare-up due to the US-Iran conflict. The US Federal Reserve will also make its policy decisions on April 29. Despite speculation that the BoJ may hike interest rates as part of its monetary tightening goal, the central bank is expected to maintain its key short-term interest rate at 0.75%.

The BoJ has been pursuing monetary tightening since 2024, when it raised rates to a range of 0 to 0.1% from minus 0.1%. Since then, the central bank has raised rates on July 31, 2024, January 24, 2025, and December 19, 2025. However, the current growth-inflation dynamics of the country have been deteriorated by the US-Iran war, leading to heightened uncertainty.

Market Expectations Experts believe that the BoJ will hold rates in the upcoming policy meet, citing the impact of the West Asian conflict on the country's economy. VK Vijayakumar, chief investment strategist at Geojit Investments, noted that despite the expected pause, the BoJ is likely to remain hawkish in the light of the potential impact on inflation from oil price hike.

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According to Harshal Dasani, Business Head at INVasset PMS, the BoJ is widely expected to keep its policy rate unchanged at 0.75% and this is likely to be interpreted as a hawkish hold rather than a policy pause. Dasani said the focus will be firmly on forward guidance, especially around inflation sustainability and the timing of the next rate move.

Ravi Singh, Chief Research Officer (Research) at Master Capital Services, also believes the BoJ may keep the interest rates unchanged at 0.75%. Singh highlighted that Japan's core CPI is expected to be at 1.9% in FY26, while broader core consumer prices rose 2.7%, which is still above the BoJ's target of 2%.

Impact on Indian Stock Market According to Dasani, a steady BoJ is supportive in the near term for emerging markets like India, as it reduces the risk of a sharp unwind in yen-funded carry trades and helps maintain global liquidity stability. However, Dasani added that the risk lies in the forward path, as any signal of an imminent rate hike could trigger capital rotation toward Japan, tightening liquidity for emerging markets and keeping Indian equities and bonds susceptible to intermittent volatility.

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Singh noted that for an emerging market like India, a BoJ neutral or steady stance could be in broader terms a good sign, as with any rate decision India wouldn't be directly affected. He added that aspects like low Japanese yields will increase yen carry trades, which in turn helps the liquidity in the emerging markets, meaning more funds flowing into emerging market assets like bonds and equities.