Japanese Yen edges higher vs bullish USD amid expectations of a more hawkish BoJ

USD/JPY struggles to capitalize on its weekly gains registered over the past three days.
A more hawkish repricing of the BoJ rate hike path underpins the JPY, capping the pair.
The USD bulls on the post-Fed rally and further draws support from Middle East jitters.

Haresh Menghani FXStreet

The USD/JPY pair edges lower during the Asian session on Thursday, snapping a three-day winning streak and eroding a part of the previous day's gains to a nearly two-week high. Spot prices currently trade around the 156.00 mark as the focus now shifts to the highly anticipated Bank of Japan (BoJ) rate decision on Friday.

The Japanese central bank is universally expected to raise its benchmark interest rate by 25 basis points (bps) to a 31-year high of 1.25% at the end of the September policy meeting. Moreover, traders have been pricing in a greater chance of a follow-through up move in December amid inflation risks stemming from higher energy prices. This, in turn, is seen as offering some support to the Japanese Yen (JPY) and weighing on the USD/JPY pair.

Meanwhile, the US Dollar (USD) touches a fresh high since late July in the wake of the US Federal Reserve's (Fed) hawkish rate hike on Wednesday. In fact, the US central bank raised borrowing costs for the first rate hike in over three years, and the so-called dot plot indicated one more interest rate increase this year. Moreover, oil-driven inflation fears underpin prospects for further Fed tightening, supporting the USD and the USD/JPY pair.

Apart from this, escalating Middle East tensions further underpin the safe-haven buck. In the latest developments, Iran-backed Houthi rebels said that Saudi aircraft have carried out more than 450 air strikes across Yemen in the past week and claimed that they shot down a Saudi F-15 fighter jet over Marib province. This keeps geopolitical risks premium in play, favouring USD bulls and contributing to limiting the downside for the USD/JPY pair.

USD/JPY 4-hour chart

Technical Analysis

The USD/JPY pair retains a bearish near-term bias below the 156.60-156.65 confluence – comprising the 100-period Simple Moving Average (SMA) on the 4-hour chart and the 50.0% Fibonacci retracement. Further up, barriers are seen at the 61.8% level at 157.55 and the 78.6% retracement near 158.81 ahead of the swing high at 160.42.

The setup, however, suggests that rallies remain vulnerable while the broader corrective phase from the cycle top persists. On the downside, initial support emerges at the 38.2% retracement at 155.78, ahead of the 23.6% level at 154.68, while a deeper pullback would expose the structural floor around 152.91.

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

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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