• The Bank of Japan is widely expected to leave interest rates unchanged at 0.75% on Thursday.
• The Middle East war and higher energy prices are complicating the economic and inflation outlook.
• Markets will look for clues on whether a rate hike could still come as soon as April.

The Bank of Japan (BoJ) is expected to leave its benchmark interest rate unchanged at 0.75% at the end of its monetary policy meeting on Thursday, adopting a cautious stance as the Iran war-related spike in energy prices adds uncertainty to the economic and inflation outlook.

After delivering a rate hike in December, followed by two pauses in January and February, the Japanese central bank is likely to remain on hold in March as well to assess the cumulative impact of previous tightening steps in an increasingly uncertain environment.

The war in the Middle East has become a key factor behind this cautious approach. Japan’s heavy dependence on imported energy leaves the economy exposed to Oil price shocks, which could both lift inflation and weigh on growth. Against this backdrop, the BoJ is seeking to avoid tightening policy too early, as that could hurt consumption and business investment.

Domestic fundamentals remain broadly consistent with further monetary policy normalization. Economic growth has remained resilient, while spring’s wage negotiations point to robust pay increases that should support inflation dynamics over the medium term. Still, the BoJ is likely to wait for more visibility, particularly from the full Shunto wage results and upcoming business surveys.

What to expect from the BoJ interest rate decision?

The Bank of Japan is expected to keep rates unchanged at this meeting while maintaining a hawkish bias. Policymakers are likely to emphasize their data-dependent approach and the need to closely monitor how geopolitical tensions affect the economy and inflation.

BoJ Governor Kazuo Ueda is expected to reiterate that the normalization path remains intact, while also stressing that uncertainty linked to energy prices and financial conditions warrants a gradual approach. Analysts from several banks, including Citibank and JPMorgan, expect the BoJ to stress flexibility while avoiding a firm commitment on the timing of the next hike.

Markets continue to attach meaningful odds to a rate increase as soon as April, although that scenario will depend heavily on developments in the Middle East and confirmation that wage-driven inflation remains on track.

According to a Bloomberg survey, market expectations remain firmly anchored around a pause in March, but with increasing confidence in a near-term hike. All 51 economists surveyed expect the Bank of Japan to keep rates unchanged at 0.75%, while 37% now anticipate a rate hike as early as April, up from 17% in the previous survey. Bloomberg also notes that nearly two-thirds of respondents see April as the earliest possible timing for a move, although some analysts still point to later dates, including June and July.

Some BoJ board members, such as Hajime Takata, may again argue in favor of tightening, which would be seen as a sign that hawkish momentum is building within the Policy Board.

How could the Bank of Japan's monetary policy decision affect USD/JPY?

Investors are fully expecting a hold this week, which means the focus will fall squarely on the BoJ’s communication and on the tone struck by Governor Kazuo Ueda. A clearly hawkish message that keeps the door open to an April hike could provide temporary support to the Japanese Yen (JPY).

However, several factors are limiting the Japanese currency’s upside potential. The persistent strength of the US Dollar (USD), supported by geopolitical uncertainty and safe-haven flows, continues to weigh on the JPY. In this context, even firmer BoJ rhetoric may not be enough to trigger a lasting reversal in USD/JPY.

At the same time, Japanese Yen weakness remains a major constraint for the central bank. It is feeding imported inflation through higher energy costs and increasing the risk of a loss of policy credibility. Japanese officials have already stepped up verbal warnings, and the risk of intervention in the foreign exchange market is rising as USD/JPY approaches the 160.00 level.

Against this backdrop, the BoJ will need to strike a delicate balance between caution over growth risks and the need to contain further JPY depreciation. Communication that clearly leaves the door open to near-term tightening could prove essential to stabilizing the currency, even if the current uncertainty argues for patience in the very near term.

From a technical perspective, USD/JPY retains a bullish near-term bias as price holds above the rising 50- and 100-period Simple Moving Averages (SMAs) on the 4-hour chart at 158.71 and 157.68, respectively, keeping buyers in control. The recent pullback from the 159.70 area is shallow, and the Relative Strength Index (RSI) has eased near 49.9, signalling cooled but still balanced momentum rather than a decisive shift to selling pressure.

Measured from the 152.27 low to the 159.75 high, USD/JPY is consolidating above the 23.6% Fibonacci retracement at 157.99, suggesting the broader uptrend structure remains intact despite the short-term consolidation.

The 50-period SMA at 158.71 provides a dynamic support that guards the upside bias. A break beneath 157.99 would expose the 100-period SMA at 157.68, ahead of the 38.2% retracement at 156.89 as the next significant floor. On the topside, initial resistance comes at the recent high and swing top near 159.75, and a clear move above this level would open the way toward fresh cycle highs beyond 160.00, reinstating stronger bullish momentum on the 4-hour horizon.