BOJ NOTES FOCUS HAS SHIFTED FROM DEFLATION DOWNSIDE RISKS TO INFLATION OVERSHOOT THREATS

The Bank of Japan's meeting notes indicate that policymakers have shifted their primary concern from downside risks to deflation toward the danger that inflation will overshoot the central bank's target. This reframing signals that the BOJ sees its earlier anti-deflation stance as having largely achieved its aim, raising the prospect that the policy bias could tilt toward tightening over time. The main transmission channel runs through the rate differential: a hawkish reassessment narrows the gap between Japanese and U.S. yields, which tends to support the yen and pressure carry trades that have been funded in low-yielding yen. Japanese government bonds, where yields would rise on any perceived normalization, and yen-denominated assets are the most directly exposed, while equity exporters could face headwinds from a firmer currency. Traders will focus on the next Tokyo core CPI release and the BOJ's upcoming policy decision for confirmation of whether the revised inflation outlook translates into concrete changes in rate guidance or bond purchase policy.

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