Bank of Japan Poised to Lift Rates to 1%—Highest Level Since 1995

The Bank of Japan (BoJ) is set to announce its monetary policy decision on Tuesday, around 3:00 GMT.

The BoJ is widely expected to enact a hawkish shift by raising its benchmark interest rate by 25 basis points to 1%, the highest level recorded since 1995. This increase aims to curb rising inflation while also addressing the yen’s recent strengthening.

Governor Kazuo Ueda, who was hospitalized last week, will not attend the policy meeting. Deputy Governor Ryozo Himino will chair the session, and Deputy Governor Shinichi Uchida will conduct the subsequent press conference.

Ahead of the decision, the USD/JPY pair is trading above 160.00, a psychological threshold often cited as a potential intervention level by Japanese authorities.

The Middle East crisis has reached a turning point, with the United States and Iran agreeing to reopen the Strait of Hormuz and extend the ceasefire by 60 days, facilitating continued negotiations. Financial markets reacted positively, prompting modest weakness in the US dollar across foreign‑exchange markets.

What to expect from the BoJ interest rate decision?

Although a rate hike has been largely anticipated, its direct impact on the yen may be limited. Nevertheless, BoJ policymakers are expected to discuss scaling back purchases of Japanese Government Bonds (JGBs), a move that could shape the currency’s near‑term trajectory.

Japan’s annual inflation, as measured by the Consumer Price Index (CPI), rose to 1.4% in April, down slightly from 1.5% in March. In contrast, wholesale prices surged to 6.3% in May, underscoring persistent inflationary pressures even as the Iran conflict may be nearing resolution.

The inflationary effect is not solely driven by higher oil prices; the yen’s sharp depreciation is inflating the cost of imports and raw materials. The BoJ’s mandate explicitly focuses on price stability, targeting a 2% annual inflation rate.

While the current CPI of 1.5% year‑over‑year may not by itself justify a rate hike, the combination of rising wholesale prices and yen weakness strengthens the case for tightening.

Governor Ueda, before his hospitalization, emphasized that policymakers should not examine oil prices in isolation, noting that temporary energy shocks can become entrenched and influence wages, expectations, and price‑setting behavior.

‘With inflation expectations already elevated and wages accelerating, the risk of second‑round effects becomes significant,’ Ueda noted, adding that the distinction between temporary and persistent inflation is not mechanical.

How could the Bank of Japan’s monetary policy decision affect USD/JPY?

As noted earlier, markets have already priced in a 25‑basis‑point hike, and any further bond‑purchase decisions are largely reflected in pricing. Given that Japanese policymakers rarely surprise investors and tend to proceed cautiously—particularly with Deputy Shinichi Uchida leading the press conference—the BoJ’s announcement is expected to have a limited effect on the yen.

Valeria Bednarik, Chief Analyst at FXStreet, observes that the USD/JPY pair is hovering around 160.00, sustaining a positive bias even as easing market concerns dampen demand for the dollar. The daily chart reveals a bullish 20‑day simple moving average (SMA) trending upward, comfortably above the 100‑ and 200‑day SMAs. Although technical indicators have lost momentum, they remain above their midlines, indicating limited directional strength. The 20‑day SMA is currently acting as near‑term support near 159.65.

Bednarik adds that a breach below the dynamic support could trigger a decline toward 159.00, with further selling potentially testing the 158.60 level, a historical support zone. The pair peaked at 160.73 in April—a multi‑decade high that merits close attention if the yen continues to weaken. While a move toward 161.00 is technically possible, it appears improbable that authorities would permit such a level without intervening.

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