Japanese Yen gathers strength ahead of BoJ rate decision

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USD/JPY loses ground to near 159.70 in Thursday’s Asian session.
The BoJ is widely expected to keep its benchmark rate unchanged on Thursday.
Fed decided to keep its overnight lending rate steady at its March meeting on Wednesday.

The USD/JPY pair trades in negative territory around 159.70 during the Asian trading hours on Thursday. The Japanese Yen (JPY) edges higher against the Greenback amid intervention fears by Japanese authorities. Markets turn cautious ahead of the Bank of Japan (BoJ) interest rate decision later on Thursday.

The Japanese central bank raised interest rates to a 30-year high of 0.75% in December and has signaled its readiness to keep increasing borrowing costs if Japan continues to progress towards durably achieving its 2% inflation target backed by wage gains. The BoJ is widely expected to maintain its benchmark rate at 0.75% during its meeting concluding on Thursday. Traders will closely monitor the BoJ's Governor Kazuo Ueda press conference for any hints about the next move.

The surge in oil prices from the Iran war could hit corporate profits and the economy with rising fuel costs. This might give Japan’s Prime Minister Sanae Takaichi's administration another reason to push back against an early rate hike, which could weigh on the JPY. Despite heightened uncertainty from the Iran war, markets see roughly a 60% probability of another rate hike in April.

On the other hand, verbal intervention from Japanese officials might cap the downside for the JPY and act as a headwind for the pair. Japan’s Finance Minister Satsuki Katayama said that recent currency moves are not in line with fundamentals, reiterating warnings of possible action by authorities. She added that she is watching financial markets with an extremely high level of vigilance.

On the USD front, the Fed held interest rates steady at its March meeting on Wednesday, maintaining the benchmark federal funds rate in a target range of 3.5% to 3.75%. The central bank signaled that it still expects one cut this year, even though traders pull back their bets for rate reductions in 2026.

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.