Japanese Yen struggles for direction as BoJ interest rate decision looms

• USD/JPY trades little changed as traders await the BoJ’s monetary policy announcement.
• The BoJ is expected to hold rates steady on Friday, with traders looking for clues on a December hike.
• US inflation and GDP data keep hawkish Fed expectations intact, although the Dollar struggles to gain ground.

USD/JPY trades little changed on Thursday as the Japanese Yen (JPY) underperforms most of its major peers, although a softer US Dollar (USD) keeps the pair from gaining much ground. Traders remain cautious ahead of the Bank of Japan’s (BoJ) monetary policy announcement on Friday. At the time of writing, USD/JPY trades around 157.90.

The BoJ is widely expected to keep interest rates unchanged at 1.25% following a 25-basis-point (bps) hike in September and a total of 50 bps of tightening so far this year. A pause would give policymakers more time to assess how previous increases are affecting borrowing conditions and economic activity.

With a hold largely expected on Friday, attention will centre on the bank’s updated growth and inflation forecasts and Governor Kazuo Ueda’s press conference. Traders anticipate another rate hike in December as higher energy costs and rising import costs from a weak Yen add to inflation pressure.

The latest inflation data showed that prices excluding fresh food rose 2.1% YoY, up from 1.7% and above the BoJ’s 2% target. Inflation excluding both fresh food and energy increased to 2.4% from 1.9%. Before the policy announcement, Japan's October Tokyo Consumer Price Index (CPI) and September unemployment figures will provide another look at inflation and labour market conditions.

Analysts at Commerzbank argue that, for FX markets, the key issue at upcoming BoJ meetings is less the immediate decision and more the guidance for year-end, noting that “for FX markets, the more important question will therefore be what the BoJ signals about December.” They point out that “markets currently price in an around 80% probability of a rate hike by then,” which is “in line with our own expectation that the BoJ will raise the policy rate to 1.5%.” In their view, “recent BoJ communication, alongside the economic backdrop, increasingly suggests that the next step towards policy normalization is approaching.”

In the United States (US), data released on Thursday showed annual headline and core PCE inflation rising, while third-quarter GDP growth exceeded expectations. Personal income and spending fell short of forecasts, although lower-than-expected jobless claims pointed to continued low layoffs.

The releases keep a December Federal Reserve (Fed) hike firmly in play after policymakers held rates steady on Wednesday. Even so, the US Dollar struggles to sustain its initial post-data gains. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, eases toward 102.00 after reaching an intraday high of 102.33.