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Yen Finds Support, Dollar Recovers Modestly: The Japanese Yen recovered some lost ground against the US Dollar on Thursday, though gains remained limited, as USD/JPY stabilized near 158.42, up 0.11% on the day.
The pair pulled back from earlier highs as broad Dollar weakness resurfaced, even as US macro data pointed to resilient growth and easing inflation pressures.
BoJ Set to Hold Rates as Political Risks Complicate Policy Path
Market attention is now firmly centered on Friday’s Bank of Japan policy decision, with the central bank widely expected to keep its benchmark interest rate unchanged at 0.75%, following December’s hike to a 30-year high.
The decision is expected to be announced between 03:30 and 05:00 GMT, followed by Governor Kazuo Ueda’s press conference at 06:30 GMT, which investors see as the main event risk
The BoJ is likely to strike a careful balance—signaling confidence in a moderate economic recovery, while avoiding language that could further fuel volatility in bond markets.
Election Uncertainty and Yield Spike Cloud BoJ Communication
The BoJ’s task has been complicated by heightened market volatility, triggered by Prime Minister Sanae Takaichi’s decision to call a snap election next month.
Markets fear that the election could pave the way for aggressive fiscal stimulus, including potential tax cuts and expanded spending, raising concerns over Japan’s already elevated public debt levels.
These concerns have already pushed Japanese government bond (JGB) yields sharply higher, forcing the BoJ to tread carefully in its messaging—seeking to support the yen without exacerbating the rise in yields.
Growth Forecast Likely to Be Revised Higher
Sources cited by Reuters suggest the BoJ may raise its growth forecast in its quarterly outlook report for the fiscal year starting in April, while maintaining its view that the economy remains on track for a moderate and sustained recovery.
The central bank is also expected to reiterate its commitment to further rate hikes if economic activity and inflation evolve in line with projections.
However, Governor Ueda is unlikely to provide explicit guidance on the timing of the next move, leaving markets to read between the lines.
Weak Yen Adds Inflation Pressure
Despite December’s rate hike, the yen has continued to weaken, pushing up import costs and sustaining upward pressure on prices.
Continued weakness in the yen could speed up the transmission of higher import costs to consumers, raising domestic price pressures. This dynamic may eventually force the Bank of Japan to tighten monetary policy at a faster pace, with expectations pointing to two interest rate hikes later this year.
Bond Market Stress Raises QT Questions
The surge in JGB yields has also reignited debate over the BoJ’s quantitative tightening (QT) strategy, under which it has been gradually reducing bond purchases to shrink its balance sheet.
While some analysts suggest the BoJ could temporarily pause tapering or conduct emergency bond-buying if market stress intensifies, such measures are seen as unlikely in the near term, as they would run counter to the bank’s broader exit from years of ultra-loose policy.
US Data Fails to Reignite Dollar Rally
On the US side, a string of solid releases failed to provide sustained support for the Dollar:
Q3 GDP expanded at an annualized 4.4%, beating expectations.
Core PCE inflation rose 2.9% QoQ, in line with forecasts.
Initial Jobless Claims edged up to 200K, still well below expectations.
The data reinforced expectations of policy easing later in 2026, limiting upside momentum for the Greenback.
What’s Next
Beyond the BoJ decision and Japan’s CPI release, markets will also digest US PMI surveys and University of Michigan consumer sentiment data on Friday.
Until clearer policy signals emerge, USD/JPY is likely to remain sensitive to political headlines, bond market moves, and central bank communication, with volatility risks tilted higher into the end of the week.
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