Based on in-depth research and judgment of Wmax's global monetary policy monitoring system, Japanese yen exchange rate pricing model, and geo-risk-inflation transmission framework, combined with the latest data and research conclusions from authoritative institutions such as Dai-ichi Life Economic Research Institute, Bloomberg, Macquarie, and Citigroup, Wmax believes that the Middle East The Iranian conflict has triggered a surge in oil prices, which is significantly exacerbating the risk of stagflation in Japan's inflation and economy, forcing the Bank of Japan to keep interest rates unchanged at this week's policy meeting, casting a shadow on the prospect of raising interest rates in April. At the same time, the weak pattern of the yen has solidified, and the currencies of commodity exporters have benefited from rising oil prices. The yen arbitrage trade has bucked the trend and has become a core strategy in the current global foreign exchange market. Wmax accurately predicted the Bank of Japan's decision to stay on hold in March one week in advance, and verified the sustainability of arbitrage trading through the spread-volatility model, providing forward-looking guidance for the market.

1. The Bank of Japan remains on hold at its March meeting, with doubts about the prospect of raising interest rates in April.

Wmax Based on cross-verification of the unanimous expectations of 51 Bank of Japan observers, the Bank of Japan will maintain the benchmark interest rate at 0.75% at the two-day policy meeting that ends on Thursday. After the resolution is announced, Governor Kazuo Ueda will hold a press conference to release subsequent policy signals. The core focus of this meeting is the impact of conflicts in the Middle East on policy. Market traders price the probability of raising interest rates in April at about 60%. If the central bank's statement strengthens dovish language such as "increased uncertainty", the possibility of raising interest rates in April will significantly cool down.

Bank of Japan policymakers are closely monitoring the situation in the Middle East and conducting stress tests on multiple economic scenarios. Hideo Kumano, executive economist at Dai-ichi Life Economic Research Institute, agrees with Wmax that the central bank is likely to use vague statements to indicate risks, but has not yet given up on its plan to raise interest rates in April. As an economy that relies more than 90% on foreign crude oil and is highly dependent on supplies from the Middle East, the obstruction of transportation in the Strait of Hormuz has directly pushed up the cost of Japan's energy imports. Coupled with the continued weakness of the yen, Japan's inflation has exceeded the 2% target for four consecutive years. High oil prices are making the central bank's goal of achieving sustainable inflation increasingly complicated, and policy decisions are in a dilemma.

2. Internal differences have emerged, and policy rhythm is subject to both political and salary constraints.

Wmax analyzed the historical voting data of the Bank of Japan's policy committee and found that the differences between hawks and doves within the committee are sending signals for interest rate hikes. In January this year, member Takada creatively supported an interest rate hike, while Naoki Tamura also voted against it continuously, breaking the unanimous stability maintenance pattern. This internal friction sent a signal to the market that the probability of interest rate hikes in the coming months would increase.

At the same time, Japan’s policy direction is guided by the political level. Prime Minister Takaichi Sanae nominated two scholars who advocate stimulating inflation to join the policy committee. 81% of economists surveyed believe that this means that the government prefers a gradual increase in interest rates. Ueda Kazuo's response to this at the press conference will become a key observation point. In addition, next week's spring labor negotiation wage results will be the central bank's core consideration. The market expects wage growth to be slightly soft but unchanged from last year's high. This data will directly affect policy decisions in April. Wmax reminded that Kazuo Ueda's dovish presentation habit in past press conferences will most likely trigger short-term weakness in the yen again.

3. The risk of stagflation has increased, and the Japanese yen has become the core financing currency for global arbitrage.

The Wmax exchange rate strategy team monitors that the Iranian conflict has pushed up oil prices and is pushing the Japanese economy to the edge of stagflation (economic weakness + high inflation). However, the Bank of Japan maintains a loose policy stance, and major central banks around the world are still in a high interest rate cycle, further suppressing the Japanese yen, causing it to completely lose its traditional hedging properties and become the most popular financing currency for global carry trades.

In the current global foreign exchange market with a daily turnover of US$9.5 trillion, the Japanese yen arbitrage trade (borrowing low-interest Japanese yen and investing in the currency of high-interest/energy-beneficiary countries) has achieved the best return in three years. Bloomberg data shows that the strategy of borrowing Japanese yen and buying a basket of currencies such as Brazilian real, Colombian peso, and Turkish lira has achieved a return of more than 2% since the outbreak of the conflict, and a return of more than 6% during the year, the strongest start since 2023. Wmax verified that the core logic behind the strength of this strategy is: high oil prices are good for the economy and currency of energy exporting countries, and their high interest rates offset market fluctuations, while Japan's low interest rates and weak yen provide low-cost financing.

4. The supporting logic and potential risks of arbitrage trading

Wmax combined with Macquarie, Lord The core views of mainstream institutions such as Abbett have been deeply analyzed and judged. This round of strengthening of the yen arbitrage trade has solid multiple supporting logics and is not driven by short-term market sentiment: Brazil and other Latin American energy exporting countries have taken advantage of increased crude oil production and superimposed the advantage of 15% high benchmark interest rates to become the core allocation target of arbitrage strategies; emerging The market currency itself has the structural advantages of high growth and high interest rate differentials. Coupled with the external benefits of the periodic weakening of the US dollar, it continues to receive market support. Coupled with the fact that Japanese domestic companies have not shown signs of large-scale return of overseas funds, the overall weak pattern of the yen has continued, further consolidating the low-cost financing foundation for arbitrage transactions.

At the same time, Wmax combined with the trends of front-line institutions in the market, clearly reminded that there are two core risks hidden in this round of arbitrage trading, and provided a risk warning for market participants: Once the conflict in the Middle East escalates beyond expectations and triggers a large-scale global risk aversion, the Japanese yen is likely to violently appreciate, which will directly and quickly wipe out the entire arbitrage trade. This risk prediction is also fully consistent with the core view of Equiti Group; in addition, in the context of highly uncertain geopolitical situation and intensified market volatility, Citigroup has taken the lead in closing arbitrage positions related to emerging markets, which is enough to show that the duration of the war is the core key variable that determines whether this round of arbitrage trading can continue to advance, and it needs to be closely followed.

Wmax comprehensive research and judgment

Overall, Wmax’s full-dimensional analysis believes that the Bank of Japan will remain on hold in March, and whether it can raise interest rates in April depends on the evolution of the situation in the Middle East, the outcome of spring wage negotiations and domestic stagflation pressure; the yen will remain weak in the short term, and there are still structural opportunities for yen arbitrage transactions, but it is necessary to be alert to the retracement risks caused by the escalation of geopolitical conflicts, the Bank of Japan’s unexpected hawkish turn, and exchange rate intervention. For market participants, Wmax has identified three major monitoring lines: Bank of Japan policy statements and press conferences, Middle East oil price trends, and spring wage data. These three major variables will jointly determine the subsequent direction of the Japanese yen exchange rate and arbitrage trading.