Market bets on a near-term interest rate hike by the Bank of Japan have solidified, but Nomura has poured cold water on this optimism. Swap market pricing indicates traders see about a 75% probability of a BoJ rate hike in June, with the likelihood before July even higher at approximately 92%. However, Michio Saito, executive research fellow at Nomura Institute of Capital Markets Research, stated at a financial industry event on Wednesday that, due to risk factors such as a potential war in Iran potentially driving up oil prices and subsequently weighing on the Japanese economy, he is "not sure" if the policy board's path toward raising rates "will be smooth sailing." Saito, who held a key bond policy position at Japan's Ministry of Finance until 2023, carries weight with the market. His caution suggests that while the timing for a rate hike may technically be ripe, external geopolitical risks are adding uncertainty to the BoJ's decision-making path, indicating that the market's current high level of optimism may be subject to revision. Timing is Ripe, but Path is Questionable Saito did not deny the necessity of a rate hike but expressed caution regarding its implementation path. "The timing for a rate hike has come, or at least is very close," he said, while simultaneously emphasizing that whether the policy board can smoothly proceed with a hike remains unknown. The nuance in this statement lies in Saito distinguishing between "whether the timing is ripe" and "whether it can be smoothly implemented"—he leaned affirmative on the former but retained clear uncertainty on the latter. For traders betting on a near-term hike, this distinction is noteworthy. Iran Situation Poses Key Downside Risk Saito singled out a potential Iran war as the core external variable affecting the BoJ's decision. He pointed out that a prolonged closure of the Strait of Hormuz would further intensify concerns over crude oil and liquefied natural gas supply. For the Japanese economy, which is highly dependent on energy imports, this risk "is not just a matter of price increases; there is also a risk that economic activity itself could stagnate." The impact of an energy price shock on Japan's economy is dual-faceted: on one hand, it could push inflation higher, supporting policy tightening from a rate hike logic; on the other hand, it could suppress economic growth, making the central bank more conservative on raising rates. Saito's judgment leans toward the latter—the economic downside pressure from geopolitical risks could lead the BoJ to stand pat. Japanese Government Bond Yields May Have Overshot Regarding the Japanese government bond (JGB) market, Saito believes recent yield increases show signs of having overshot. He noted that market concerns over inflation prospects and expectations of possible expanded government fiscal spending have jointly pushed yields higher, but current levels appear elevated relative to the overall shape of the yield curve. The benchmark 10-year JGB yield climbed to 2.8% on May 18, a high not seen since 1996. Saito believes that, considering the overall structure of the yield curve, the reasonable range for the 10-year yield should be around 2.0% to 2.5%, and the current level is a significant deviation from this range.