The Bank of Japan is expected to leave its policy rate at 1.00% on Friday, one meeting after a 25bp hike lifted borrowing costs to a 31-year high. Traders will read Governor Kazuo Ueda’s guidance and the quarterly Outlook Report for the timing of the next move, with USD/JPY sitting near 40-year highs.
The Bank of Japan is widely expected to leave its policy rate unchanged at 1.00% on Friday, having delivered a 25bp rate hike in June that lifted borrowing costs to a 31-year high. With no policy change anticipated, attention shifts to Ueda’s guidance, the quarterly Outlook Report and any signals on when the next increase lands.
December remains the market’s base case for that hike, which would lift rates to 1.25% by year-end. However, September or October could emerge as live meetings if inflation proves more persistent or the yen resumes its decline.
Ueda meets a second Takaichi appointee
Friday’s meeting also marks the first appearance of board member Ayano Sato, the second appointee of dovish PM Sanae Takaichi, adding to scrutiny over the balance of views inside the policy board. For Ueda, the challenge will be balancing support for the yen through hawkish communication while avoiding friction with a government wary of higher interest rates.
Policymakers are likely to maintain a tightening bias, yet a broadly balanced message would suggest continuity rather than a hawkish shift, potentially limiting the immediate market reaction. Nevertheless, inflation pressures linked to yen weakness, elevated energy costs and rising wage growth suggest the BoJ is unlikely to abandon its cautious normalization path.
Core CPI at 1.6% keeps the overshoot warning alive
Japan’s core CPI rose to 1.6% year-on-year in June from 1.4% previously, although it has remained below the BoJ’s 2% target for several months. Policymakers nevertheless expect import costs, producer prices and currency weakness to support inflation later this year.
The Outlook Report is expected to show a somewhat stronger growth backdrop than projected in April, while inflation forecasts may be revised slightly lower because of government subsidies and softer oil prices. Because the BoJ projected fiscal 2026 growth of 0.5% and core inflation of 2.8% in April, this week’s revisions could prove important for rate expectations. The bank is still expected to retain its warning that inflation could overshoot the 2% target.
Supporting the hawkish case, the latest Tankan survey showed corporate inflation expectations reaching record highs, and Japanese government bond yields remain elevated near multi-decade highs. More hawkish policymakers have also argued that interest rates sit below neutral levels and may need to rise further.
USD/JPY pinned near 164
USD/JPY recently climbed to fresh 40-year highs near 164 before easing toward 163.50 levels on Tuesday, supported by the wide US-Japan yield gap and expectations that the Fed may keep policy restrictive for longer. Assuming Japanese authorities don’t intervene at 164, the next key resistance is seen around the 165.00 region, with a break potentially opening the door for fresh highs.
A hawkish shift in BoJ communication, particularly if it revives intervention concerns from Tokyo, could instead trigger a pullback toward 162.00, with stronger support emerging around the 160.00 area. A cautious message from Ueda may instead keep pressure on the yen, while clearer warnings about inflation risks and a firmer commitment to further tightening could provide support.
Markets are already pricing another hike by year-end, meaning policymakers may need to hint at a possible Autumn rather than late-year move to generate a more sustained yen recovery.
Source: ActionForex
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