Japanese Yen pares gains amid Ueda’s lack of clarity on the next rate hike

Can USD/JPY hold near 157.70 after recovering from session lows of 157.12?
Further interest rate increases remain on the cards, BoJ Governor Ueda signals, without clarifying when they may come.
As widely anticipated, the BoJ concluded its monetary policy meeting with interest rates unchanged at 1.25%.

USD/JPY has recovered to around 157.70 from session lows of 157.12, leaving the pair flat on the daily chart as the Japanese Yen (JPY) surrenders earlier gains against the US Dollar (USD) on Friday. Remarks from Bank of Japan (BoJ) Governor Kazuho Ueda have offered no support to the Japanese currency.

Speaking earlier on Friday, Ueda expressed confidence that Japan’s economy would maintain moderate growth in the near term, noting that its “financial conditions are accommodative”. On monetary policy, he said the bank would “continue to raise the policy rate”, while stressing the need to monitor the effects of FX, AI and the Middle East.

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

Does the BoJ’s sustained 2% inflation outlook keep gradual tightening in focus for the Yen?

At 7.2/10, the FXS Speechtracker score is slightly below the speaker’s historical average of 7.7/10. A mildly hawkish bias emerges from the emphasis on underlying CPI being consistent with the 2% target. However, references to accommodative financial conditions, government support measures and only moderate growth point to a cautious, data-dependent approach rather than aggressive tightening.

Before Ueda’s remarks, the BoJ had kept its benchmark interest rate unchanged at 1.25%, in line with widespread expectations, and announced that inflation had reached the 2% target established in 2013. The statement indicates that the bank expects core inflation to remain broadly steady at levels consistent with its price target, with inflation risks still tilted to the upside.

Meanwhile, modest risk aversion is supporting demand for safe-haven assets, helping the US Dollar recover earlier losses ahead of the European session’s opening. Google’s Alphabet shares suffered their worst day on record on Thursday, falling 12%. That sell-off pulled Asian markets lower on Friday, as fears of an AI bubble severely dented investors’ appetite for equities.

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. Its responsibilities include issuing banknotes and managing currency and monetary conditions to maintain price stability, defined by an inflation target of around 2%.

How has the Bank of Japan’s monetary policy evolved?

Against a backdrop of low inflation, the Bank of Japan adopted an ultra-loose monetary policy in 2013 to support economic activity and lift prices. At the heart of its approach is Quantitative and Qualitative Easing (QQE), which involves printing money to purchase assets, including government and corporate bonds, and inject liquidity. The bank intensified this approach in 2016, easing policy further by introducing negative interest rates and subsequently taking 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?

Large-scale stimulus from the Bank weakened the Yen against its major currency peers. The depreciation intensified in 2022 and 2023 as the policy gap widened between the Bank of Japan and other leading central banks, which raised interest rates sharply to tackle 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 after the BoJ opted to move away from its ultra-loose policy.

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

Japanese inflation rose above the BoJ’s 2% target as a weaker Yen coincided with a surge in global energy prices. Expectations of higher domestic wages, a key driver of inflation, also helped prompt the policy shift.