Japanese Yen struggles due to BoJ’s rate hike uncertainty

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USD/JPY remains in the positive territory for the third successive day after registering over 0.5% gains on Thursday, currently trading around 159.60 during the Asian hours on Friday. However, the pair moves little due to thin trading activity amid the Good Friday holiday.

The Japanese Yen faces challenges as uncertainty persists over the Bank of Japan’s policy outlook.
BoJ’s Koji Nakamura told parliament that higher oil prices pose risks to economic growth and could impact outlook.
The US Dollar holds ground on safe-haven demand following recent Iran threats from President Trump.

The Japanese Yen (JPY) remains under pressure against the US Dollar (USD) as uncertainty builds around the Bank of Japan’s (BoJ) policy outlook. While the Japanese central bank has hinted at a potential rate hike this month, markets remain uncertain about whether it will offer clear forward guidance ahead of its April 28 policy meeting.

According to Reuters, a senior BoJ official indicated on Friday that the central bank will continue raising interest rates if its economic projections remain on track, reinforcing a tightening bias even as recent surveys highlight growing strain on firms from rising fuel costs linked to Middle East tensions.

Meanwhile, BoJ Executive Director Koji Nakamura told parliament that although higher oil prices pose risks to economic growth, they could also lift underlying inflation by boosting long-term inflation expectations.

The USD/JPY pair holds ground as the US Dollar (USD) receives support from rising safe-haven demand following the recent Iran threats from US President Donald Trump. Trump offered no clarity on steps toward reopening the Strait of Hormuz, warning of intensified military action over the next two to three weeks and issuing strong threats against Iran.

In response, Iran’s Foreign Minister Abbas Araghchi said that recent US strikes on civilian infrastructure would not force a retreat, describing them instead as evidence of an opponent in disarray and moral decline.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.