Japanese Yen holds firm after BoJ’s hawkish hold

• USD/JPY trades slightly lower as the Yen outperforms most major currencies.
• The BoJ’s hawkish hold and firmer inflation assessment support the Japanese Yen.
• A recovering US Dollar and expectations of further Fed rate hikes limit the USD/JPY’s decline.

USD/JPY holds trades on the back foot heading into the weekend as the Japanese Yen (JPY) outperforms most major currencies following the Bank of Japan’s (BoJ) hawkish hold. However, the pair has recouped some of its earlier losses as the US Dollar (USD) recovers. At the time of writing, USD/JPY trades around 157.43, off an intraday low of 156.96, and remains on track to end the month little changed.

As widely expected, the BoJ kept its policy rate unchanged at 1.25% in an 8-1 vote at its October meeting on Friday. Board member Hajime Takata dissented, favouring a 25-basis-point (bps) increase to 1.50% and arguing that conditions call for a faster move toward the neutral interest rate.

The central bank said it will continue raising interest rates as economic, price and financial conditions evolve. The timing and pace of further increases will depend on whether the economy and prices develop in line with its baseline outlook, as well as the risks surrounding it.

BoJ inflation upgrade keeps Yen rate hike odds firmly in play

Strategists at Brown Brothers Harriman underscore the significance of the Bank of Japan’s latest communication, noting that “for the first time since adopting the 2% target in 2013, the BoJ declared underlying CPI inflation ‘generally consistent’ with its goal.” In their view, that shift “strengthens the case for additional rate hikes to ensure inflation remains anchored there.”

They add that while the BoJ made only “minor growth revisions,” it “raised its inflation forecasts for 2027” and continues to see inflation risks “skewed to the upside,” with the risk to the economic outlook described as “generally balanced.” Despite the more confident inflation stance, BBH points out that “there was no material shift to BoJ rate expectations,” with the swaps curve still pricing in “80% odds of a 25bps BoJ rate hike to 1.50% at the December 18 meeting and nearly 75bps of tightening in the next twelve months.”

On the US side, the Greenback recovers after coming under pressure earlier on Friday as a technology stock sell-off drove demand for government bonds and pushed Treasury yields lower. Investors remain concerned about returns on heavy AI spending following disappointing earnings reports. The US Dollar Index (DXY), which tracks the Greenback against six major currencies, rebounds toward 102.00 after falling to 101.59.

Expectations of additional monetary policy tightening support the US Dollar. Traders price in around a 72% chance of a December rate hike, according to the CME FedWatch Tool. The latest Personal Consumption Expenditures (PCE) data showed US inflation remains above the Fed’s 2% target, while stronger-than-expected third-quarter Gross Domestic Product (GDP) growth gives the central bank more room to raise rates.

St. Louis Fed President Alberto Musalem reinforced that outlook on Friday, saying the US central bank would raise interest rates again soon and that current policy remains accommodative. He added that “gradual rate adjustments” are preferable to sudden moves.