BoJ held rates but sounded hawkish, boosting yen; dollar weakened ahead of Fed decision amid geopolitical and tariff uncertainties.
The Bank of Japan (BoJ) held its key policy rate at 0.75%, as expected, but hawkish commentary triggered a sharp yen rally. The BoJ signaled it will continue raising rates if economic activity and prices align with projections, marking a cautious but persistent tightening stance.
On Wait-and-watch: Japan’s benchmark rate, near zero from 1999 and negative between 2016 and 2024, has risen four times since March 2024, reaching its highest level in three decades after December’s 0.25% hike.
Japan Interest Rate Trajectory
Source: BoJ
The central bank also revised its forecasts, raising 2026 core inflation to 1.9% from 1.8% and GDP growth to 1%, while trimming 2027 growth to 0.8%. This reflects optimism for the near term but caution over longer-term prospects amid political uncertainty. A snap election on Feb. 8 sees Prime Minister Sanae Takaichi seeking a mandate for expansionary fiscal policies, which may influence the BoJ’s future moves.
Governor Kazuo Ueda emphasized the bank will assess the impact of prior hikes before deciding on the next, and could intervene in bond markets to limit yield spikes. ING described his comments as neutral, giving no immediate signal of another hike. Following the announcement, the yen surged to 157.39 vs the dollar before retreating to 158+ levels.
Dollar Under Pump: Meanwhile, the U.S. dollar is under pressure, weighed down by geopolitical tensions, including Trump’s Greenland tariff threats, which were later softened after NATO talks. The Dollar Index is down over 1% this week despite strong domestic data.
Eyes On Fed: Traders are now closely watching the Federal Reserve’s upcoming rate decision on Wednesday. After three consecutive 0.25% cuts since September, the Fed is widely expected to stand pat, with markets focused on its forward guidance amid resilient U.S. growth and persistent inflation. The combination of a hawkish BoJ and softening dollar suggests potential short-term volatility in USD/JPY, offering trading opportunities around key technical levels.
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