Highlights: The Bank of Japan (BoJ) left its benchmark interest rate unchanged at 0.75 per cent in its April meeting. However, the 6-3 vote represented the biggest divide under BoJ Governor Ueda’s leadership, suggesting more policymakers in favour of faster monetary policy normalisation. Impact to growth and inflation outlook from the energy shock is key to watch. Our base case remains that the BoJ will conduct one more 25bp rate hike in July, although the risk of a hike in June is rising. On the back of elevated valuations, risks to earnings from the energy shock and the overhang of a faster pace in rate hike, we recently downgraded Japanese equities to neutral. We maintain our neutral stance on JPY and JGBs given the more balanced upside and downside risks.

• Japanese equities (Neutral): Some of the fundamental drivers which has driven strong performance of the Japanese stock market such as policy stimulus, corporate governance reforms and AI remain intact. That said, with the market up 10.7 per cent y-t-d, 18.0x 12-month forward P/E (at 1.6 standard deviation above its 5-year average of 15.8x), and the 10 per cent 2026 consensus earnings growth, we think attractiveness has decreased especially when compared to other developed market equities. We also expect the Middle East conflict adding to pressures on corporate profit margins, and companies to project a more conservative outlook in their forward guidance during the FY26 reporting season over the next two months
• JPY (Neutral): With uncertainties on the BoJ’s policy normalisation timeline and the negative real rates, we still expect there could be swings for JPY, with more risk to the weaker side. We see USDJPY staying elevated at around 160 in H1 before moderating to end the year at 155. For the JPY to stage a more sustainable recovery, we think it will require supportive flow measures, a more proactive BoJ, and greater fiscal discipline. We retain our neutral view on the currency
• JGBs (Neutral): The push–pull between sticky underlying inflation and elevated inflation expectations on the one hand, and heightened growth uncertainty plus policy and event risk on the other, argues against taking a strong directional stance on JGBs at this stage. We will stay vigilant to key catalysts, such as inflation prints, the growth outlook, and fiscal headlines, as they are likely to drive near-term range-bound trading and curve volatility