USD/JPY firms as BoJ holds rates, Fed decision eyed

• USD/JPY extends gains, trading near 145.05 as traders favor the US Dollar amid global risk jitters.
• The Bank of Japan keeps its rates unchanged at 0.5% and reaffirms a gradual JGB taper plan through 2027.
• Focus shifts to Wednesday’s Federal Reserve decision and updated rate projections for fresh cues on the direction of the US Dollar.

The Japanese Yen (JPY) is weakening against the US Dollar (USD) for the third consecutive day on Tuesday, as the Greenback remained firm amid lingering Middle East tensions and the Bank of Japan's (BoJ) status quo policy stance. The central bank left its benchmark rate unchanged at 0.5%, in line with market expectations, providing little support for the Yen as traders stick with the US Dollar’s safe-haven appeal.

At the time of writing, USD/JPY trades near 145.05, up about 0.67% for the week and staying just shy of last week’s peak. The pair holds firm as US Dollar demand persists, shrugging off mixed US Retail Sales and softer Industrial Production prints, with market focus still anchored on geopolitical risks and the wide Fed-BoJ policy divergence.

The Bank of Japan maintained its benchmark interest rate steady at 0.5% on Tuesday, aligning with market expectations, while also announcing plans to ease the pace of its bond purchase reductions in the coming year. Policymakers indicated they will scale back bond buying more gradually than previously planned to help maintain stability in long-term yields, which have faced upward pressure recently. Governor Kazuo Ueda reinforced the central bank’s cautious stance, noting that any further policy tightening will depend on consistent progress toward stable inflation and growth, while the bank remains ready to act if bond market conditions become volatile.

Meanwhile, as part of its gradual policy normalization, the Bank of Japan reaffirmed its roadmap to scale back Japanese Government Bond (JGB) purchases by ¥400 billion each quarter through March 2026. From April 2026 onward, the pace of tapering will slow to ¥200 billion per quarter, with a target to reduce monthly purchases to around ¥2 trillion by March 2027. This measured approach underscores the BoJ’s intention to gradually unwind its ultra-loose stance while minimizing sudden market disruptions, particularly as global economic and geopolitical risks persist. Adding to the Japanese Yen’s downside, reports also indicated that Prime Minister Shigeru Ishiba and US President Donald Trump failed to reach a tariff deal during the G7 summit in Canada, further dampening market sentiment.

Looking ahead, the spotlight turns to the Federal Reserve’s (Fed) policy decision on Wednesday, which will likely set the tone for the US Dollar in the near term. While no change in rates is widely expected, traders will dissect the updated dot plot and Chair Jerome Powell’s press conference for hints on when rate cuts could come back into play. With signs of easing inflation in the United States and lingering trade frictions, investors will be alert to any shifts in the Fed’s outlook that could sway US Dollar flows.

The Bank of Japan keeps its rates unchanged at 0.5% and reaffirms its