Japanese Yen Weakens Ahead of BoJ Decision and Key Inflation Data

The Japanese Yen (JPY) remained under pressure on Thursday, with the USD/JPY pair climbing for the second consecutive day. The pair traded near 148.00, up roughly 0.75%, as a stronger US Dollar kept momentum in favor of the Greenback. Traders are now turning their attention to two major risk events on Friday: Japan’s Consumer Price Index (CPI) report and the Bank of Japan’s (BoJ) interest rate decision.

Fed Eases While BoJ Holds Steady

The latest move in USD/JPY comes after the Federal Reserve cut interest rates by 25 basis points, its first reduction since December 2024. The Fed also signaled a gradual easing cycle ahead, reinforcing US Dollar strength against the Yen.

In contrast, the BoJ is expected to leave its policy rate unchanged at 0.50%. Markets are keen to hear Governor Kazuo Ueda’s forward guidance, as Japan balances stronger economic data with lingering risks to domestic demand.

Japan’s Economic Picture

Recent figures show Japan’s economy is holding up better than expected:

• Q2 GDP was revised upward to 2.2% annualized.
• The output gap turned positive (+0.3%) for the first time since 2023, pointing to stronger demand.
• Inflation remains above the BoJ’s 2% target, with core readings around 3%.

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However, challenges persist. Real wages remain under pressure, limiting household consumption, while the political backdrop—shaken by Prime Minister Shigeru Ishiba’s resignation—adds uncertainty. These factors make it likely that the BoJ will stay cautious, with October or December seen as the next potential windows for a rate hike.

August CPI in Focus

Friday’s CPI release will be key in shaping expectations for Japan’s monetary policy. Inflation showed signs of easing in July:

• Headline CPI slowed to 3.1% YoY (from 3.3%).
• Core CPI (excluding fresh food) also dipped to 3.1%, with forecasts pointing to 2.7% in August.
• The core-core index (excluding food and energy) stayed firm at 3.4%, underscoring persistent domestic price pressures.

If inflation continues to cool, it could give the BoJ more room to delay tightening despite above-target levels.

Diverging Central Bank Paths

The Fed’s move toward easing highlights the policy divergence with Japan. While the US central bank has begun lowering rates, the BoJ remains patient—carefully balancing growth, inflation, and domestic risks before shifting policy.

For now, the USD/JPY trend favors the Dollar, but Friday’s CPI and BoJ decision could spark volatility and set the tone for the Yen in the weeks ahead.

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