1.25%: Bank of Japan to keep interest rates unchanged

1.25% is the rate the BoJ is expected to maintain on Friday.
Investors will focus on the BoJ’s next steps on interest rates.
For the past six weeks, USD/JPY has traded in a consolidation range of 156-159.

Around 02:30 GMT on Friday, the Bank of Japan (BoJ) is scheduled to release its monetary policy decision.

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 Japanese central bank raised rates by 25 basis points (bps) to 1.25%, a level not seen in Japan for 31 years. That brought this year’s tightening to two quarter-percentage-point increases.

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

In a note, Commerzbank said markets anticipate “the overnight rate remaining steady, and none of the economists surveyed by Bloomberg expects a hike on Friday”. With that outcome widely expected, investors are placing greater weight on the monetary policy statement, the central bank’s outlook report and Governor Kazuo Ueda’s press conference for guidance on policy through year-end.

2% inflation goal and AI demand underpin Ueda’s hawkish tilt

Energy-related inflation risks have featured in BoJ Governor Ueda’s comments since the September policy meeting. Alongside these concerns, he has emphasised the need to anchor core inflation close to the 2% target. He has repeatedly reaffirmed that monetary tightening will continue.

An 8.2/10 score from FXStreet’s Speechtracker for Ueda’s 16 October speech indicated a modest hawkish tilt relative to his average score of 7.5. Describing underlying inflation as “quite close” to 2%, Ueda said economic activity and prices were broadly tracking forecasts. His pledge to “continue to raise interest rates” while financial conditions remain accommodative reinforced a bias towards gradual normalisation. So did the plan to discuss whether the assessment of inflation approaching 2% should be adjusted. That stance supports a firmer Yen.

On AI-driven inflation pressures, Ueda said there was “no big gap” between the Bank of Japan’s assessment and those of global policymakers. He also noted that some counterparts were more optimistic about AI demand. These remarks highlight upside price risks that justify retaining the option of further tightening. The speech explicitly linked the timing and pace of future rate increases to FX, AI demand and developments in the Middle East. This signalled 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 Ueda will retain a hawkish policy outlook and emphasise the need to anchor price pressures close to the BoJ’s 2% target.

Nearly 70% expect a hike this quarter: December policy outlook

Nearly 70% of economists, or 54 of 78, expected the BoJ’s policy rate to reach 1.5% this quarter, Reuters reported, citing its 13-19 October poll. The proportion was almost double that in the previous survey. Another increase before year-end is the consensus expectation.

USD/JPY reaction hinges on BoJ rate guidance

With market participants firmly expecting rates to stay unchanged, the decision itself looks unlikely to move USD/JPY. Instead, the tone of the BoJ’s policy outlook and any indication of its terminal-rate assessment are likely to carry more weight.

A signal that the BoJ could reach its terminal rate sooner would favour the Japanese Yen (JPY). By contrast, guidance pointing to gradual monetary tightening could leave the currency little changed. The balance of risks for USD/JPY is therefore moderately skewed to the downside.

156.08-159.04 range: USD/JPY Technical Outlook shows lower volatility

Trend: Around 157.80 is where USD/JPY trades at the time of writing. For more than a month, the pair has been confined to a narrow 156.08-159.04 range. A flat 20-day exponential moving average (EMA) at 157.77 also points to a sideways overall trend.

Momentum: A month within the 40.00-60.00 band for the Relative Strength Index (RSI) signals a marked contraction in volatility, reinforcing the consolidation pattern.

Support: The range floor at 156.08 provides the first downside support. A failure to defend 156.08 would expose the pair to the 14 September high of 155.00.

Resistance: Near 159.04, the top of the consolidation range presents the first upside obstacle. A decisive move above it would strengthen the prospect of further gains towards 160.00, with the September high near 160.40 next.

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

Bank of Japan: key 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. In practice, this means targeting inflation of around 2%.

How has the Bank of Japan’s policy evolved?

Against a backdrop of low inflation, the Bank of Japan adopted ultra-loose monetary policy in 2013 to support economic activity and lift prices. Quantitative and Qualitative Easing (QQE) forms the basis of that policy: the bank prints money to purchase assets, including government and corporate bonds, and inject liquidity. Further easing followed in 2016 as the bank intensified this approach, first introducing negative interest rates and then directly controlling the yield on its 10-year government bonds. A rate increase in March 2024 marked an effective retreat from the BoJ’s 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. Depreciation intensified in 2022 and 2023 as the BoJ’s policy diverged further from those of other major central banks. Those banks raised rates aggressively to tackle inflation at multi-decade highs. The resulting widening of interest-rate differentials weighed on the Yen. In 2024, the trend partially reversed after the BoJ opted to end its ultra-loose policy stance.

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

Japanese inflation moved above the BoJ’s 2% target as Yen weakness and surging global energy prices pushed prices higher. Expectations of wage growth in Japan, a key driver of inflation, also helped prompt the policy shift.