(Bloomberg) — The yen pared losses against the dollar as the Bank of Japan kept its policy interest rate steady and said a virtuous cycle of wages and prices is intensifying while keeping an eye on the global trade situation.
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Japan’s currency was 0.1% lower at 149.42 against the dollar as of 12:05 p.m. in Tokyo, after weakening as far as 149.64 before the BOJ decision. It touched a five-month high last week. All economists surveyed by Bloomberg News had expected the BOJ to hold pat this time.
In today’s statement, the BOJ added a reference to the evolving situation regarding trade and other policies to its list of risks to the outlook. Japan’s central bank has hiked rates three times in the year since it ended the world’s last negative interest rate.
“The bank must maintain its rate-hike stance to prevent further yen depreciation, while managing the pace of rate adjustments and market expectations through clear communication,” said Shoki Omori, chief global desk strategist at Mizuho Securities Co. in Tokyo.
The yen has shown some signs of strength since the start of 2025, in stark contrast to four straight years of losses, but growing uncertainties about the global economy and domestic politics may potentially impact the timing of the BOJ’s next move.
This raises the risk of speculators reversing net long positions in the Japanese currency – which are at a record high – should BOJ Governor Kazuo Ueda signal the next hike may be later than expected at his press conference Wednesday afternoon.
Still, “the statement wasn’t as dovish as expected and maintained a neutral stance,” making it hard to sell the yen further, said Yujiro Goto, head of FX strategy at Nomura Securities Co.
Speculation of more rate increases has also brought Japan’s government bond yields to their highest levels in almost two decades, as investors anticipate that the yield gap between the US and Japan will narrow further. The swaps market is pricing in a 71% chance of a hike by July and certainty by October.
Traders will be watching for any comments from Ueda on the bond market, even though earlier this month the governor signaled that he’s not too concerned about the rise in yields.
The market will also be paying attention to politics in Japan. Prime Minister Shigeru Ishiba’s support plunged after he distributed vouchers to lawmakers, and investors are speculating that reflationist Sanae Takaichi may become a front-runner to replace him should Ishiba step down, which would likely weigh on the yen.