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The Bank of Japan is anticipated to keep interest rates unchanged after its two-day policy meeting. This comes amid easing trade tensions following an agreement with Washington, and the bank has not set an exact time for its announcements within the expected 0230 – 0330 GMT window.
Governor Kazuo Ueda’s press conference at 06:30 GMT will be watched for indications of potential rate hikes later in the year. Policymakers are considering the risks to growth from U.S. tariffs against rising inflation, which is fuelled by increasing food costs.
Bank of Japan Inflation Forecast
The BoJ may revise its inflation forecast upwards for the current fiscal year, though it will maintain that core inflation, driven by domestic demand, remains below 2%. Despite a possibly softer stance on economic risks, the bank is expected to underscore uncertainty from higher U.S. tariffs on business sentiment.
The Bank of Japan is likely to keep short-term rates at 0.5%, balancing improved conditions with global risks. The USD/JPY currency pair increased following the Federal Open Market Committee.
The Bank of Japan is expected to keep its short-term interest rate at 0.5% this week, signaling cautious optimism after the trade agreement with Washington earlier this year. We believe this points to a period of stability in the very near term. This sets the stage for a “wait-and-see” approach from policymakers.
Looking Back The Historic End
Looking back at the historic end of negative interest rates in March 2024, the current pause is part of a longer, gradual normalization process. With the USD/JPY exchange rate currently holding near the 155 level following the last U.S. Federal Reserve meeting, all eyes will be on Governor Ueda’s press conference. Any hints about the timing of the next rate hike will be the primary focus for the market.
Inflationary pressures are building, with Japan’s core CPI for June 2025 coming in at 2.3%, the third consecutive month it has remained above the bank’s 2% target. The BoJ will likely revise its inflation forecast upward in its report this week. However, we expect them to maintain that this is not yet driven by strong domestic demand.
For derivative traders, this suggests that short-dated volatility may be overpriced. With a rate hold almost certain, selling one-week USD/JPY options could be a viable strategy, as implied volatility for that tenor has already fallen below 7%. The main event is not what the BoJ will do, but what it will say about the future.
The more interesting trade might be to position for a potential policy shift later in the year, as policymakers have signaled they will resume tightening once uncertainties fade. We see value in buying options dated for the fourth quarter of 2025, where implied volatility remains elevated above 9%. This allows traders to position for a potential hike when the bank feels more confident about the economic outlook.
