Bank of Japan Expected to Raise Rates, Yen Calm

The Japanese yen saw a slight dip on Thursday as it moved into the European trading session. The USD/JPY pairing is currently trading at 156.25, reflecting a decrease of 0.16% for the day.

Bank of Japan's Anticipated Rate Hike

As the Bank of Japan (BoJ) prepares for its upcoming meeting early on Friday, all eyes are on the central bank. Analysts expect the BoJ to increase interest rates by 25 basis points, which would raise the cash rate to 0.50%. The central bank has indicated that it would raise rates if there is evidence of higher wage growth, suggesting that inflation is becoming sustainable. Furthermore, BoJ officials have expressed optimism about rising wages, with Deputy Governor Himino mentioning last week that many companies are planning to raise wages at least as much as they did the previous year.

The Impact of External Factors

Investors are particularly keen to analyze the BoJ's upcoming rate statement. It is possible that the tone may be dovish, as BoJ officials have shown concerns over President Donald Trump's potential trade tariffs, which could be implemented as early as February 1. Such tariffs might create instability in the financial markets, prompting the BoJ to tread carefully as it assesses the impacts of the 'Trump factor'.

The Yen's Performance Against the Dollar

A major factor supporting the potential rate hike is the underperformance of the Japanese yen, which has depreciated by about 9% over the past three months. Meanwhile, the Federal Reserve appears more hawkish and may only implement one or two rate hikes this year. If the BoJ opts to remain inactive again, the yen risks further declines.

Inflation Insights from Japan

Aside from the rate discussion, Japan is set to release its core Consumer Price Index (CPI) data for December. Core inflation in Japan has been on the rise, with expectations that it will reach 3% year-over-year, up from 2.7% in November, which marked a three-month high. This core inflation rate, which is closely monitored by the BoJ, has consistently stayed above the central bank's 2% target for more than two years now.

Technical Analysis of USD/JPY

• Currently, USD/JPY is testing support at the level of 156.20, with further support found at 155.68.
• On the upside, the next resistance levels are seen at 157.04 and 157.56.

yen, rates, inflation