Yen Slips as BoJ Guidance on Interest Rate Hikes Remains Murky

The Japanese yen (JPY) declined against the U.S. dollar (USD), erasing earlier gains following comments from Bank of Japan (BoJ) Governor Kazuo Ueda. Despite the BoJ's first interest rate hike since July, Ueda provided limited insights into the timing of subsequent increases.

As of 1:07 p.m. in London, the JPY had depreciated by 0.3% to 156.58 per USD, reversing an earlier 0.8% gain. The BoJ's policy-sensitive two-year and five-year government bond yields reached their highest levels since 2008. The Topix and Nikkei share indexes also lost their gains.

"The BoJ's decision did not provide any hawkish surprises to justify a higher terminal policy rate than currently implied by money markets," said Elias Haddad, senior strategist at Brown Brothers Harriman. "This suggests a less aggressive pace of tightening."

The BoJ's third rate hike in less than a year brings the policy rate to its highest level since 2008. Market focus has now shifted to the timing of the next increase. Overnight index swaps indicate a 68% probability of another move by July and 100% by October.

The latest hike reduces the interest rate differential between Japan and the U.S., which has contributed to the yen's weakness. Further improvement in this metric is likely later this year, as the BoJ has raised most of its inflation projections, with six now at or above 2%.

"The risk of a third hike this year is increasing in my view," said Alvin Tan, FX strategist at Royal Bank of Canada in Singapore, although he still anticipates only one further quarter-point increase.

However, some analysts caution that the BoJ's gradual hike pace may not be sufficient to halt the yen's recent declines. A sharp drop in the currency could prompt intervention from Japanese authorities, as Finance Minister Katsunobu Kato has indicated a willingness to take action against excessive currency moves.

"The yen could move towards 158, as the BoJ has kept its options open," said Shoki Omori, chief global desk strategist at Mizuho Securities. "As long as the Fed maintains its stance, the dollar-yen pair will likely appreciate again."

Lee Hardman, senior strategist at MUFG, suggests that the yen faces resistance at 155 per dollar, representing its 55-day moving average. He notes that the currency has failed to strengthen beyond this level since the beginning of the year, despite general dollar weakness.

Ueda also highlighted lingering uncertainties surrounding President Donald Trump's proposed tariffs, which he believes could have a greater impact on prices than in the past. Before the BoJ's announcement, the yen appreciated amid a broader decline in the dollar after Trump indicated a preference to avoid tariffs against China.

"The timing of the next BoJ rate hike is influenced by factors beyond the Japanese economy and wages," said Charu Chanana, chief investment strategist at Saxo Markets in Singapore. "Global uncertainties, such as the Fed's slowing rate cuts and the potential impact of tariffs, remain outside Ueda's control."