The Japanese Yen is trading positively against the US Dollar, yet it stays near its recent monthly low. Japan’s Consumer Price Index (CPI) exceeded the Bank of Japan’s 2% target in May, prompting expectations for future interest rate hikes and bolstering the Yen amid rising geopolitical tensions.

Despite these factors, the BoJ’s cautious strategy in reducing its monetary stimulus has pushed back expected rate hikes to Q1 2026. Concerns about US tariffs on Japanese goods and their economic impact also limit the Yen’s gains. Meanwhile, Federal Reserve economic policies lend support to the USD/JPY pair.

Monetary Policy Signals

Governor Ueda of the BoJ stated that inflation might align with the price target, keeping Japan’s real rate low. The BoJ intends to raise interest rates following economic projections, although it plans to slow bond purchase reductions from 2026. Existing tariffs and geopolitical concerns might cause Japan to delay rate hikes in 2025.

The National CPI rose by 3.5% in May, while core CPI reached its highest since January 2023 at 3.7%. The Federal Reserve, projecting rate cuts by 2025’s end, remains wary of tariffs affecting pricing. Rising tensions, coupled with BoJ expectations, continue to support the Yen.

Following recent market data, it’s clearer now how certain policy directions may shake out over the coming quarters. The Japanese Yen is showing resilience on the surface, largely backed by above-target inflation figures, though its relative strength remains restrained. These CPI results—especially the core measure hitting a fresh high since January 2023—have rekindled talk of monetary tightening. However, those watching price action closely should remain aware that timing remains everything.

Ueda’s remarks suggest policy adjustments remain conditional. Despite inflation indicators pointing towards the Bank of Japan’s 2% target, there’s an intentional delay built into their planning. This slower adjustment reflects more than just conservatism—it’s recognition that consumer demand recovery hasn’t firmly taken root. When paired with export uncertainties fuelled by tariff risks, delaying tighter policy seems less like hesitation and more a buffer against external shocks.

Federal Reserve and the US Dollar

We’re seeing the Federal Reserve taking a different turn. While they continue to assess the impact of tariffs on overall price stability, their path seems set on eventual easing, albeit slowly and cautiously. That alone gives the Dollar consistent support in relative terms, particularly when compared with the BoJ’s insistence on holding the line until mid-decade.

For us, two calendar points are emerging as relevant: the start of 2025, when geopolitical and trade frictions could resurface at scale, and early 2026, when the Bank of Japan is likely to adjust further. Between now and then, pressure on Japanese fixed-income markets could stay modest, especially with bond purchase tapering also suggested to take a back seat for the time being.

We should also remain aware of investor psychology. Rising CPI figures might usually spark hawkish moves, but in this case, they’ve done more to temper rather than hasten expectations. That divergence between inflation performance and rate response offers tactical opportunities, especially in volatility pricing or timing entries around upcoming policy meetings.

Expectations are becoming easier to read, though not necessarily faster to price into futures or swaps. What matters now is less the direction of movement and more the staggered pace at which central banks proceed. Carry strategies may still find support in wider rate differentials, but constant reassessment will be required if geopolitical escalation accelerates. The revised calendar for bond purchase reductions suggests this isn’t a passing phase—it’s now a defined commitment to gradualism.

In the weeks ahead, let’s continue to watch how changes in CPI trajectory intersect with evolving trade threats. These combined inputs are shaping implied volatilities and have started to filter into forward positioning. We’ll be adjusting our exposure accordingly, especially as more exact guidance emerges from central bank communications.

Create your live VT Markets account and start trading now.