Japanese Yen awaits fresh direction from Bank of Japan interest rate decision

• USD/JPY trades cautiously as markets await Friday’s Bank of Japan rate decision.
• A 25-basis-point rate hike is almost fully priced in, shifting attention to inflation data and Governor Ueda’s guidance.
• Expectations of more Fed rate hikes keep the US-Japan interest rate gap wide and support the US Dollar.

USD/JPY trades cautiously on Thursday as attention shifts to the Bank of Japan’s (BoJ) monetary policy decision on Friday after the Federal Reserve (Fed) delivered a widely expected 25-basis-point rate hike on Wednesday. At the time of writing, the pair trades around 156 after touching an intraday low of 155.34.

Markets are almost fully pricing in a 25-basis-point increase from the BoJ, which would lift the policy rate from 1.00% to 1.25%, its highest level in around three decades. A Reuters poll conducted earlier this month showed that all but two of 68 economists, or 97%, expect the central bank to raise rates.

The focus will therefore be on BoJ Governor Kazuo Ueda’s guidance about the next policy move. In the same Reuters poll, 24 of 66 economists expected the central bank to follow with another increase to 1.50% in either October or December. Higher energy prices linked to the war in the Middle East, persistent domestic inflation and the Yen’s earlier weakness support the case for higher borrowing costs. Japan’s National Consumer Price Index (CPI) data is also due ahead of the decision.

A rate increase accompanied by a signal that another move could come in the next few months may strengthen the Japanese Yen (JPY). However, if the BoJ raises rates but Ueda avoids giving a clear timeline, the widely expected decision could trigger profit-taking in the Yen and allow the pair to rebound.

Strategists at Scotiabank note that markets have “moved quickly to price in a BoJ hike over the past few weeks,” underscoring what they describe as “a meaningful shift in the govt/BoJ approach to official currency management as officials moved from intervention to a more fundamentally-driven approach.” In their view, “the outlook for relative central bank policy remains JPY-supportive as markets move to price in a more aggressive tightening path for the BoJ.”

Against this backdrop, Scotiabank highlights that “for USD/JPY, we continue to highlight support at 153 and 152 and have shifted our upside focus to 158 following the latest break of 155,” reinforcing a constructive technical bias for the Yen as policy expectations evolve.

Meanwhile, prospects of additional Fed rate hikes could keep the US-Japan interest rate gap wide, favouring the higher-yielding US Dollar. The Fed unanimously raised its target range to 3.75%-4.00% on Wednesday, while the updated dot plot showed that 16 of 18 policymakers expect at least one more quarter-point increase by year-end. According to the CME FedWatch Tool, markets see around a 50% chance of another rate hike in October.

Following the Fed decision, the US Dollar Index surged to a seven-week high of 100.37. The index, which tracks the Greenback’s value against a basket of six major currencies, now trades around 100.21, hovering just below an intraday high of 100.24 after briefly pulling back toward the psychological 100.00 mark earlier in the day.