Japanese Yen drifts higher ahead of BoJ rate decision

USD/JPY softens to near 160.15 in Tuesday’s early Asian session.
Trump declared Iran ‘has agreed to never have a nuclear weapon.’
BoJ is widely expected to raise its short-term policy rate to 1.0% from 0.75% on Tuesday.

Lallalit Srijandorn FXStreet

The USD/JPY pair declines to around 160.15 during the Asian trading hours on Tuesday. The Japanese Yen (JPY) strengthens against the US Dollar (USD) following a deal to reopen the Strait of Hormuz. All eyes will be on the Bank of Japan (BoJ) interest rate decision later on Tuesday.

US President Donald Trump said on Tuesday that Iran agreed not to ever have a nuclear weapon, per the Guardian. On Monday, Trump and Vice President JD Vance both virtually signed the agreement to end a US blockade of Iranian ports, reopen the Strait of Hormuz, and start 60 days of nuclear negotiations. Parliament Speaker Mohammad Bagher Ghalibaf signed the document for the Iranian side. Hopes of a US-Iran peace agreement provide some support to the JPY and act as a headwind for the pair.

The BoJ is expected to raise interest rates to a 31-year high on ‌Tuesday, marking another landmark step in normalizing monetary policy as it focuses on taming price pressures from the energy shock caused by the Iran war.

BoJ Governor Kazuo Ueda is in the hospital with an infected liver cyst. Deputy Governor Ryozo Himino will chair the meeting, marking the first time a BOJ governor has missed a policy session since 1998. Fellow Deputy Governor Shinichi Uchida will handle the post-meeting press conference.

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.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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