- The Bank of Japan is widely anticipated to maintain interest rates at 0.50% during its May policy meeting.
- The prevailing uncertainty stemming from the trade disputes initiated by the United States will heavily influence the central bank’s decision-making process.
- The Japanese Yen may experience further depreciation following the BoJ’s expected decision to hold steady.
The Bank of Japan (BoJ) is scheduled to announce its monetary policy decision following the conclusion of a two-day meeting on Thursday. Market analysts and investors broadly expect that policymakers will elect to keep the benchmark interest rate unchanged at 0.50%.
Attention will then turn to any indications regarding potential future monetary policy adjustments in the near term, in conjunction with the release of updated economic forecasts. The Japanese Yen (JPY) is expected to react accordingly to any signals emanating from the central bank.
What to expect from the BoJ interest rate decision?
As previously stated, the Japanese central bank is widely expected to maintain interest rates at their current level of 0.50%, which represents the highest rate observed in the past 17 years. The BoJ implemented a 25 basis points (bps) increase in January, citing progress toward achieving its 2% inflation target, but opted to remain on hold during its March meeting.
With respect to economic projections, the BoJ’s January forecasts indicated a Gross Domestic Product (GDP) growth rate of 1.1% for fiscal year 2025 and 1% for fiscal year 2026. These figures are subject to potential revision in light of the ongoing trade tensions, particularly given Japan’s reliance on exports. Furthermore, the median outlook for consumer price inflation was projected at 2.4% and 2% for the same respective years.
Meanwhile, the trade disputes originating from the United States (US) continue to introduce uncertainty regarding economic and inflationary trends. Absent any significant progress in trade negotiations, Japan is likely to experience a contraction in export activity and a reduction in capital investment, coupled with a potential increase in inflation. Consequently, Japanese policymakers are likely to maintain a cautious approach and keep interest rates on hold until a clearer economic outlook emerges.
In anticipation of the announcement, Japanese Prime Minister Shigeru Ishiba unveiled a package of emergency economic measures in mid-April. These measures are designed to mitigate the potential impact of US tariffs on affected industries and households. The package encompasses support for corporate financing and subsidies aimed at reducing petrol prices by 10 yen ($0.07) per liter (0.26 gallons), as well as partially offsetting electricity expenses for a three-month period commencing in July.
Furthermore, Japan’s Economy Minister, Ryosei Akazawa, who is responsible for overseeing trade negotiations with the US, reiterated the government’s expectation for the complete removal of tariffs. He further clarified that the government is not considering making concessions on agricultural products in exchange for favorable treatment in the automotive sector during the negotiations.
Finally, BoJ Governor Kazuo Ueda stated last week that the central bank will continue to closely monitor economic and price data in relation to its interest rate policy decisions. Ueda is scheduled to hold a press conference following the announcement, and his remarks will be carefully analyzed for any indications regarding future monetary policy direction. The market is particularly interested in any hints about the timing and pace of future rate hikes, as well as the BoJ’s assessment of the risks to the economic outlook.
As a noteworthy observation, the US released key economic data on Wednesday. The ADP Employment Change report revealed that the private sector added 62,000 new job positions in April, significantly below the 108,000 anticipated by market participants. Additionally, the preliminary estimate of US Q1 GDP fell short of expectations, with the economy contracting at an annualized rate of 0.3% compared to the projected 0.4% expansion. These figures have fueled speculation that the US may face a recession in the near future due to the impact of tariffs imposed by the Trump administration, leading to increased risk aversion in financial markets ahead of the BoJ’s decision.
How could the Bank of Japan’s interest rate decision affect USD/JPY?
Generally, market prices reflect anticipated central bank decisions, implying that a decision aligned with expectations should have a limited impact on the JPY. Policymakers are expected to reiterate their commitment to remaining data-dependent in their approach to monetary policy. However, downward revisions to economic forecasts could exert downward pressure on the Japanese currency.
While a scenario in which BoJ officials express optimism regarding economic and inflation progress is considered unlikely, such a development would likely result in a strengthening of the JPY. Consequently, the USD/JPY exchange rate is expected to decline following the BoJ’s decision in this hypothetical scenario.
Valeria Bednarik, FXStreet Chief Analyst, observes: “The USD/JPY pair is currently trading around the 143.00 level during the American session, ahead of the BoJ’s announcement, marking a second consecutive day of gains. However, the bullish potential appears to be limited. On the daily chart, a bearish 20 Simple Moving Average (SMA) provides dynamic resistance around 143.70, while technical indicators are trending upward, albeit within negative territory and with varying degrees of strength. Furthermore, the 100 and 200 SMAs continue to decline, positioned well above the current level, reflecting the prevailing bearish trend. A recent peak at 144.02 represents the next significant level to monitor, with a sustained advance above this level required to signal a potential bullish extension in the coming sessions.”
Bednarik further adds: “Should the BoJ deliver a hawkish message, the risk for USD/JPY shifts to the downside, with the 142.00 level providing immediate support, followed by the April 23 daily low at 141.35. Further selling pressure could expose the year’s low at 139.88.”
Japanese Yen FAQs
The Japanese Yen (JPY) ranks among the most actively traded currencies globally. Its valuation is largely influenced by the performance of the Japanese economy, with specific emphasis on the Bank of Japan’s monetary policy decisions, the yield differential between Japanese and US bonds, and the prevailing risk sentiment among market participants, among other relevant factors.
One of the Bank of Japan’s primary responsibilities is managing the value of the currency, making its policy decisions crucial for the Yen. The BoJ has occasionally intervened directly in currency markets, typically to lower the Yen’s value, but it generally avoids frequent interventions due to potential political repercussions with its major trading partners. The BoJ’s ultra-loose monetary policy, maintained between 2013 and 2024, contributed to the Yen’s depreciation against its major currency counterparts due to the widening policy divergence between the Bank of Japan and other major central banks. More recently, the gradual unwinding of this ultra-loose policy has provided some support to the Yen.
Over the past decade, the BoJ’s commitment to an ultra-loose monetary policy has resulted in a growing policy divergence with other central banks, particularly the US Federal Reserve. This divergence has supported a widening of the yield differential between 10-year US and Japanese bonds, which has favored the US Dollar against the Japanese Yen. The BoJ’s decision in 2024 to gradually move away from its ultra-loose policy, coupled with interest-rate cuts by other major central banks, is narrowing this yield differential.
The Japanese Yen is often regarded as a safe-haven asset. This implies that during periods of market volatility and uncertainty, investors tend to allocate their capital to the Japanese currency due to its perceived reliability and stability. Turbulent economic times are likely to strengthen the Yen’s value relative to other currencies that are considered to be riskier investments.
