Bank of Japan signals rate hike supporting yen, USD/JPY maintains range-bound fluctuations

Reuters Finance App News — On Wednesday Asian trading hours, the US dollar weakened against the Japanese yen, falling back to around 158.70 after a slight rise in the previous trading day. The recent correction was mainly driven by the latest meeting minutes from the Bank of Japan, which signaled a hawkish stance, prompting markets to reassess the monetary policy outlook.

According to the minutes, several policymakers noted that while rising interest rates could somewhat suppress consumption, the overall financial system remains resilient. Meanwhile, in the context of actual interest rates still being deeply negative, further rate hikes are appropriate if economic growth and inflation meet expectations. This statement reinforced market confidence that the Bank of Japan will gradually exit its easing policy.

Additionally, policymakers emphasized flexibility, indicating that each meeting’s policy decisions will depend on data rather than a preset rate hike path. This “data-dependent” approach introduces uncertainty into future policy timing, but also provides markets with ongoing trading opportunities.

From an economic fundamentals perspective, recent Japanese economic data have shown signs of weakening. The composite Purchasing Managers’ Index (PMI) has declined, and core inflation has cooled due to energy subsidies, marking the first time in about four years that core CPI has fallen below the target level. However, it’s important to note that corporate cost pressures remain high, indicating inflation has not fully subsided.

Regarding external analyst views, Danske Bank’s research team believes that despite short-term data being somewhat weak, the Bank of Japan still has room to raise rates. They expect the next policy move could occur in April, with current market pricing indicating about a 50% chance of a rate hike in April. Meanwhile, analysis from Brown Brothers Harriman suggests that although inflation eased in February, underlying price pressures remain above the Bank of Japan’s forecast path for fiscal 2026.

A key variable to watch is the outcome of Japan’s spring wage negotiations. If wages continue to grow, it will support consumption and sustain inflation, providing a stronger foundation for policy tightening. A confirmed wage-inflation positive cycle could become a major driver for the yen’s medium-term appreciation.

Market performance shows that USD/JPY remains in a high-level range. On one hand, the resilience of the US economy and high interest rates continue to support the dollar; on the other hand, expectations of Japan’s policy normalization are gradually rising, providing a floor for the yen. The interplay of bullish and bearish forces results in a lack of clear short-term trend direction.

From a technical perspective, on the daily chart, USD/JPY has repeatedly faced resistance around 159, indicating strong selling pressure in that zone. Momentum indicators show signs of weakening, suggesting upward momentum is diminishing. The price remains in a high zone, with 159.00 acting as a key resistance. Without a clear breakout, the pair may continue to oscillate or even retrace.

On the 4-hour chart, the short-term trend shows sideways consolidation, with highs gradually declining, indicating waning upward momentum. Support levels are gradually rising, forming a converging pattern. 158.00 is a key short-term support; a break below could trigger further declines toward 156-157, while a move back above 159 might target higher levels.

Overall, USD/JPY is more likely to stay within the 158-159 range, awaiting further signals from the Bank of Japan and US macroeconomic data to guide the next move.

Summary

The current correction in USD/JPY is essentially a valuation adjustment driven by improved expectations of the Bank of Japan’s policy stance. With real interest rates still negative, there remains room for rate hikes, and wage growth is a key variable influencing the pace of policy normalization. In the short term, the pair is likely to remain in a high-range oscillation, but if April rate hike expectations strengthen further, the yen could see a phase of recovery. The medium-term trend will depend on the pace of Japan’s policy normalization and the trajectory of US interest rates.

(Edited by: Wang Zhiqiang HF013)

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