Bank of Japan expected to keep rates unchanged, setting stage for a hike early next year
- The Bank of Japan will likely hold interest rates at 0.25% on Thursday.
- The language in the policy statement and Governor Kazuo Ueda’s press conference will hold the key.
- The BoJ policy announcements could ramp up volatility in the Japanese Yen.
After concluding its two-day monetary policy review on Thursday, the Bank of Japan (BoJ) is expected to hold the short-term interest rate at 0.25%.
The BoJ policy announcements will likely provide fresh cues on the central bank’s rate hike outlook, injecting intense volatility in the Japanese Yen (JPY)
What to expect from the BoJ interest rate decision?
As widely expected, the BoJ is set to pause its rate-hiking cycle for the third consecutive meeting in December. Therefore, the tone of the policy statement and Governor Kazuo Ueda’s post-policy meeting press conference, due at 06:30 GMT, will hold the key for gauging the timing of the next rate hike by the BoJ.
Markets have almost priced out a potential rate hike this week after Reuters and Bloomberg News cited people familiar with the BoJ thinking, noting that the Japanese central bank was considering keeping interest rates steady at its December meeting.
One of the sources quoted by Reuters said that “policymakers prefer to spend more time scrutinising overseas risks and clues on next year's wage outlook.”
Wages in Japan have been rising at an annual pace of around 2.5% to 3%, causing inflation to remain above the central bank's 2% target for well over two years.
The BoJ’s closely watched broader price trend indicator, the “core-core" Consumer Price Index (CPI) –excluding both fresh food and energy costs–, rose 2.3% in October from a year earlier, accelerating from a 2.1% gain in September. Further, revised third-quarter Gross Domestic Product (GDP) data showed Japan's economy expanded an annualised 1.2%, at a faster pace than initially reported.
However, falling household spending and a downward revision to the private consumption data hinted at a dwindling Japanese economic recovery. Additionally, BoJ policymakers would prefer to wait for the November CPI report and the start of United States (US) President-elect Donald Trump’s administration before the next rate lift-off.
Analysts at BBH said: “The two-day Bank of Japan meeting ends Thursday with a widely expected hold. The market sees only 15% odds of a hike after several reports emerged that a pause was being considered. The risk is the BoJ paves the way for a January rate hike. The odds of a hike rise to 70% at the January 23-24 meeting, when updated macro forecasts will be released.”
How could the Bank of Japan's interest rate decision affect USD/JPY?
BoJ Governor Kazuo Ueda said in his recent public appearance that the next interest rate hikes are "nearing in the sense that economic data are on track.” "I would like to see what kind of momentum the fiscal 2025 Shunto (spring wage negotiation) creates,” Ueda added.
In case the BoJ fails to provide a clear indication of the next interest rate hike by sticking to its rhetoric that monetary policy will be decided on a meeting-by-meeting basis depending on available data, the Japanese Yen is likely to extend its bearish momentum against the US Dollar (USD).
The JPY, however, could see a sharp corrective upside if the BoJ explicitly indicates that a rate hike is coming in January while acknowledging the encouraging economic prospects.
Any knee-jerk reaction to the BoJ policy announcements could be short-lived heading into Governor Ueda’s presser and as markets digest Wednesday’s policy decision by the US Federal Reserve (Fed).
From a technical perspective, Dhwani Mehta, Asian Session Lead Analyst at FXStreet, notes: “USD/JPY faces two-way risks heading into the BoJ rate call, with a 21-day Simple Moving Average (SMA) and 50-day Bear Cross in play. Meanwhile, the 14-day Relative Strength Index (RSI) holds well above the 50 level.”
“A hawkish BoJ hold could add extra legs to the ongoing USD/JPY correction, drowning the pair toward the 152.20 area, the confluence of the 21-day SMA, 50-day SMA and the 200-day SMA. The next relevant support aligns near 151.00, at the December 10 and 11 lows. Additional declines could challenge the 150.00 psychological support. Conversely, buyers must reclaim the three-week high of 154.48 to negate the near-term bearish bias. The July 24 high of 155.99 will be next on their radars en route to the 156.50 barrier,” Dhwani adds.
Japanese Yen PRICE This month
The table below shows the percentage change of Japanese Yen (JPY) against listed major currencies this month. Japanese Yen was the weakest against the US Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.55% | -0.01% | 1.48% | 2.20% | 2.94% | 2.76% | 1.21% | |
| EUR | -0.55% | -0.56% | 0.90% | 1.64% | 2.37% | 2.20% | 0.66% | |
| GBP | 0.00% | 0.56% | 1.44% | 2.20% | 2.94% | 2.77% | 1.22% | |
| JPY | -1.48% | -0.90% | -1.44% | 0.73% | 1.46% | 1.27% | -0.25% | |
| CAD | -2.20% | -1.64% | -2.20% | -0.73% | 0.72% | 0.56% | -0.96% | |
| AUD | -2.94% | -2.37% | -2.94% | -1.46% | -0.72% | -0.17% | -1.66% | |
| NZD | -2.76% | -2.20% | -2.77% | -1.27% | -0.56% | 0.17% | -1.51% | |
| CHF | -1.21% | -0.66% | -1.22% | 0.25% | 0.96% | 1.66% | 1.51% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Japanese Yen from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent JPY (base)/USD (quote).
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.