Bank of Japan set to hold interest rates at 1.25%

• Interest rates are expected to remain at 1.25% when the BoJ meets on Friday.
• Investors will focus on the BoJ’s guidance on the future path of rates.
• Over the past six weeks, USD/JPY has traded in a consolidation range of 156-159.

With interest rates expected to stay unchanged, the Bank of Japan (BoJ) is due to deliver its monetary policy decision at around 02:30 GMT on Friday.

Following a 25 basis points (bps) increase at its September policy meeting, the BoJ’s interest rate stands at 1.25%, Japan’s highest level in 31 years. Financial markets are confident that rates will be held there, mirroring expectations for the Federal Reserve (Fed). The BoJ has raised rates twice this year, by a quarter of a percentage point on each occasion.

In a note, Commerzbank said markets anticipate “the overnight rate remaining steady, and none of the economists surveyed by Bloomberg expects a hike on Friday”. With that consensus in place, investors will look instead to the monetary policy statement, the central bank’s outlook report and Governor Kazuo Ueda’s press conference for guidance on policy through to year-end.

Ueda Signals Hawkish Stance as AI Demand and Inflation Near BoJ Goals

Since the September policy meeting, BoJ Governor Ueda has voiced concern over inflation risks stemming from energy prices. Alongside repeated assurances that monetary tightening will continue, he has emphasised the need to anchor core inflation close to the 2% target.

FXStreet’s Speechtracker assigned Ueda’s 16 October speech a score of 8.2/10, above his average of 7.5 and pointing to a modestly more hawkish stance. Underlying inflation is “quite close” to 2%, Ueda stressed, while developments in the economy and prices remain broadly consistent with forecasts. His pledge to “continue to raise interest rates” while financial conditions remain accommodative, together with plans to discuss revising the assessment of inflation’s progress towards 2%, reinforced a bias towards gradual normalisation, supporting a firmer Yen.

On AI-driven inflationary pressures, Ueda said there was “no big gap” between the Bank of Japan’s assessment and those of global policymakers, although some counterparts were more optimistic about AI demand. Those remarks highlight upside price risks that warrant retaining the option of further tightening. By linking the pace and timing of future rate increases explicitly to FX, AI demand and developments in the Middle East, Ueda set out a policy response sensitive to both data and risks. That approach offers incremental support for the Japanese Yen, particularly if AI-related demand and external shocks keep inflation around the 2% target.

Taken together, the remarks suggest that the BoJ’s Ueda will retain a hawkish policy outlook, stressing the need to anchor price pressures close to the central bank’s 2% target.

Economists Expect Another BoJ Rate Rise Before Year-End

Nearly 70% of economists, or 54 of 78, expected the BoJ to increase its policy rate to 1.5% this quarter in the Reuters poll conducted on 13-19 October, Reuters reported. That proportion was almost twice the share in the previous survey, with the consensus pointing to a further rise before year-end.

USD/JPY Faces Policy Guidance Rather Than Rate Decision as Key Driver

With market participants firmly expecting unchanged policy rates, the BoJ’s decision itself looks unlikely to be a significant event for USD/JPY. Instead, the tone of its monetary policy outlook and any indications of where policymakers see the terminal rate are likely to matter.

A signal that the BoJ could reach its terminal rate sooner would support the Japanese Yen (JPY). By contrast, guidance pointing to a gradual tightening path could leave the currency little changed. On balance, this leaves USD/JPY risks moderately skewed to the downside.

USD/JPY Technical Outlook: Range Holds as Volatility Narrows

Trend: A flat 20-day exponential moving average (EMA) at 157.77 points to a sideways trend, with USD/JPY trading around 157.80 at the time of writing. For more than a month, the pair has been confined to a range bounded by 156.08 and 159.04.

Momentum: A month within the 40.00-60.00 band for the Relative Strength Index (RSI) signals a pronounced contraction in volatility, lending further weight to the ongoing consolidation.

Support: The range floor at 156.08 provides the first downside support. Failure to defend 156.08 would leave the pair vulnerable to a move towards the 14 September high of 155.00. 

Resistance: The consolidation ceiling near 159.04 marks the immediate barrier to gains. A convincing move above it would make a further advance towards 160.00 more likely, with the September high near 160.40 next in view.

(The technical analysis of this story was written with the help of an AI tool. Know more.)