Japanese Yen pares gains amid Ueda’s vague guidance on next rate hike

157.70 Area Regained: USD/JPY Rebounds From Session Lows Of 157.12
Further rate rises remain on the agenda, BoJ Governor Ueda signals, without clarifying the timing.
1.25% remains the BoJ’s policy rate following its monetary policy meeting, in line with broad expectations.

USD/JPY is back around 157.70. The pair has recovered from session lows of 157.12 and is now flat on the daily chart. On Friday, the Japanese Yen (JPY) is surrendering earlier gains against the US Dollar (USD), with comments from Bank of Japan (BoJ) Governor Kazuho Ueda offering no support to the currency.

Speaking earlier on Friday, Ueda expressed confidence in continued moderate economic growth over the near term, describing Japan’s “financial conditions are accommodative”. On policy, he said the bank would “continue to raise the policy rate”, while stressing the need to monitor the impact of FX, AI and the Middle East.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

2% Inflation In Focus As BoJ Signals Gradual Tightening For Yen

At 7.2/10, the FXS Speechtracker reading sits slightly below the speaker’s historical average of 7.7/10. A focus on underlying CPI consistent with the 2% target suggests a mildly hawkish bias. However, references to accommodative financial conditions, government support measures and only moderate growth point to cautious, data-dependent policy rather than aggressive tightening.

Earlier, the BoJ held its benchmark rate at 1.25%, matching widespread expectations, and said inflation had reached the 2% target established in 2013. Its statement projects core inflation remaining broadly consistent with the price target, with inflation risks still tilted to the upside.

Ahead of the European session, a modest risk-off tone is supporting safe-haven demand and helping the US Dollar recover earlier losses. A record daily fall in shares of Google's Alphabet, which sold off 12% on Thursday, weighed on Asian markets on Friday. Fears of an AI bubble have sharply undermined investors’ appetite for equities.

Bank of Japan: Key Questions

What role does the Bank of Japan play?

As Japan’s central bank, the Bank of Japan (BoJ) determines the country’s monetary policy. Its responsibilities include issuing banknotes and managing currency and monetary conditions to maintain price stability, defined by an inflation target of around 2%.

How has Bank of Japan policy evolved?

Against a backdrop of low inflation, the Bank of Japan adopted ultra-loose monetary policy in 2013 to support economic activity and lift prices. At the core of its approach is Quantitative and Qualitative Easing (QQE): printing banknotes to purchase assets, including government and corporate bonds, and inject liquidity. The bank intensified this approach in 2016, easing further by introducing negative interest rates before moving to direct control of its 10-year government bond yield. A rate increase in March 2024 marked the BoJ’s effective withdrawal from its ultra-loose policy stance.

How does Bank of Japan policy affect the Japanese Yen?

Large-scale stimulus from the Bank weakened the Yen against its major currency peers. The depreciation intensified in 2022 and 2023 as policy paths increasingly diverged: other major central banks raised rates sharply to tackle inflation at multi-decade highs, while the BoJ maintained its approach. The resulting wider interest rate differentials with other currencies put further pressure on the Yen. In 2024, the BoJ’s decision to leave its ultra-loose stance behind partially reversed this trend.

What prompted the Bank of Japan to unwind ultra-loose policy?

Japanese inflation climbed above the BoJ’s 2% target as the Yen weakened and global energy prices surged. Expectations of higher domestic salaries, a key driver of inflation, also helped prompt the policy shift.