Bank of Japan set to keep interest rates unchanged at 1.25%

Markets expect no change in the BoJ’s interest rate on Friday, with the rate set to stay at 1.25%.
For investors, the focus will be on how the BoJ’s interest rate trajectory develops.
Over the past six weeks, USD/JPY has remained in a consolidation range of 156-159.

With markets looking ahead to the policy outlook, the Bank of Japan (BoJ) is due to deliver its monetary policy decision at around 02:30 GMT on Friday.

Financial markets are confident of an unchanged-rate decision from the BoJ, as they are for the Federal Reserve (Fed). At its September policy meeting, the BoJ increased rates by 25 basis points (bps) to 1.25%, taking Japan’s interest rate to its highest level in 31 years. The central bank has implemented two quarter-percentage-point rate increases so far this year.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

In a note, Commerzbank said markets foresee “the overnight rate remaining steady, and none of the economists surveyed by Bloomberg expects a hike on Friday”. With that consensus in place, investors will look more closely at the monetary policy statement, the central bank’s outlook report and Governor Kazuo Ueda’s press conference for guidance on policy through the year-end.

Does Ueda’s hawkish tilt reflect AI demand and inflation nearing BoJ goals?

Energy-related inflation risks have featured in BoJ Governor Ueda’s comments since the September policy meeting. Alongside repeatedly affirming that monetary tightening will continue, he has underlined the need to keep core inflation anchored near the 2% target.

FXStreet’s Speechtracker assigned Ueda’s October 16 speech a score of 8.2/10, above his average of 7.5 and pointing to a modest hawkish tilt. Describing underlying inflation as “quite close” to 2%, Ueda said developments in the economy and prices were broadly consistent with forecasts. His pledge to “continue to raise interest rates” while financial conditions stay accommodative, together with plans to consider adjusting the assessment of inflation nearing 2%, strengthened the bias towards gradual normalisation and a firmer Yen.

On AI-led inflation pressure, Ueda said there was “no big gap” between the Bank of Japan’s assessment and that of global policymakers, while acknowledging that some counterparts were more optimistic about AI demand. These remarks highlight upside price risks that warrant retaining the option of further tightening. The speech explicitly linked the timing and pace of subsequent rate increases to FX, AI demand and developments in the Middle East. That outlined a policy response sensitive to both data and risks, offering incremental support to the Japanese Yen, particularly if AI-related demand and external shocks keep inflation around the 2% target.

Taken together, the remarks suggest that the BoJ’s Ueda will retain a hawkish policy outlook and emphasise the need to anchor price pressures near the central bank’s 2% target.

Will the BoJ raise rates at December’s policy meeting?

Expectations centre on a further rate increase before the year-end. Reuters reported that its October 13-19 poll found nearly 70% of economists, or 54 of 78, expected the BoJ to lift its policy rate to 1.5% this quarter. That proportion was almost twice the share recorded in the preceding poll.

What could the BoJ decision mean for USD/JPY?

With market participants firmly expecting policy rates to stay unchanged, the BoJ’s rate announcement itself looks unlikely to move USD/JPY materially. Instead, the key drivers would be the tone of the central bank’s monetary policy outlook and any indications of its assessment of the terminal rate.

The Japanese Yen (JPY) would benefit from any BoJ signal that the terminal rate could be reached sooner. By contrast, indications that the central bank intends to tighten policy gradually may do little to move the currency. The balance of risks for USD/JPY is therefore moderately skewed to the downside.

USD/JPY Technical Outlook: Can the Range Hold as Volatility Narrows?

Trend: A sideways pattern remains evident in USD/JPY, which is trading around 157.80 at the time of writing. For over a month, the pair has been confined to a narrow 156.08-159.04 band. Its flat 20-day exponential moving average (EMA), at 157.77, also points to a range-bound overall trend.

Momentum: A month spent within the 40.00-60.00 band by the Relative Strength Index (RSI) signals a pronounced contraction in volatility, lending further weight to the ongoing consolidation.

Support: The range floor at 156.08 provides the nearest downside support. A failure to defend 156.08 would leave the September 14 high of 155.00 exposed.

Resistance: At the top of the consolidation range, 159.04 marks the first upside barrier. Clearing it decisively would raise the prospect of an advance towards 160.00, with the September high near 160.40 the next level to watch.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Bank of Japan: Frequently Asked Questions

What role does the Bank of Japan play?

As Japan’s central bank, the Bank of Japan (BoJ) determines the country’s monetary policy. Issuing banknotes and exercising currency and monetary control form part of its mandate to maintain price stability, defined by an inflation target of around 2%.

How has the Bank of Japan’s policy evolved?

Against a backdrop of subdued inflation, the Bank of Japan adopted an ultra-loose monetary stance in 2013 to support economic activity and lift prices. Quantitative and Qualitative Easing (QQE) underpins this approach: the bank prints money to purchase assets, including government and corporate bonds, thereby supplying liquidity. It expanded the strategy in 2016, easing policy further by introducing negative interest rates before moving to direct control of the yield on its 10-year government bonds. A rate increase in March 2024 marked the BoJ’s effective retreat from its ultra-loose stance.

How does Bank of Japan policy affect the Japanese Yen?

The Yen weakened against its major currency peers as a result of the Bank’s sizeable stimulus programme. The depreciation intensified in 2022 and 2023 as the policy gap widened between the Bank of Japan and other leading central banks, which raised rates sharply to combat inflation at multi-decade highs. By widening interest rate differentials with other currencies, the BoJ’s stance put downward pressure on the Yen. Some of that trend reversed in 2024 following the BoJ’s decision to move away from ultra-loose policy.

What prompted the Bank of Japan to begin withdrawing ultra-loose policy?

Inflation in Japan climbed above the BoJ’s 2% target as the Yen weakened and global energy prices surged. Expectations of higher domestic salaries, a key driver of inflation, also helped prompt the policy shift.