The Bank of Japan voted on interest rates, with two policymakers, Takata and Tamura, dissenting in favour of a 25 basis point rate hike. This resulted in a 7-2 majority to maintain rates, impacting the yen by adding a hawkish element that contributed to its increase.
Additionally, the Bank of Japan plans to sell its ETF holdings, currently valued at about ¥37 trillion. The decision includes selling roughly ¥330 billion of ETFs annually, suggesting it would take around 112 years to completely unwind all holdings at this pace. The central bank indicated future adjustments might occur, but disruption is unlikely.
Domestic Market Reaction
The domestic market reacted, with Japanese stocks declining, adding to the yen’s strength alongside monetary policy discussions. The USD/JPY fell to around 147.27, contesting its 200-hour moving average of 147.25. Buyers aim to maintain control after a rebound following the Federal Open Market Committee meeting.
In the broader picture, USD/JPY remains in a range between its 100 and 200-day moving averages. A decisive break from this range is needed for a new trend to develop, as the pair hasn’t shown clear movement in recent weeks.
The key takeaway for us is that the Bank of Japan is showing a more hawkish stance, even while holding rates steady today. The dissent from two policymakers wanting a rate hike is a significant signal that the pressure to tighten is building internally. Looking back, we saw similar dissents precede policy shifts by the Fed and ECB in the late 2010s, making this a pattern worth noting.
While the plan to sell ETF holdings is making headlines, its immediate market impact is minimal. At a pace of ¥330 billion per year against a massive ¥37 trillion portfolio, the direct effect is more symbolic than anything else. We’ve seen from the Federal Reserve’s quantitative tightening starting in 2022 that central banks prefer an extremely slow and predictable pace to avoid spooking markets.
Impact on Japanese Stocks
Still, this symbolism is enough to push down Japanese stocks, with the Nikkei 225 index dropping over 1.8% in today’s session. This sell-off in equities is adding to the yen’s strength as capital flows into safer assets. This dynamic, where a weaker stock market supports a stronger yen, has been a consistent theme throughout 2025.
For derivative traders, this shift suggests a change in bias towards a stronger yen in the coming weeks. The increased uncertainty means one-month implied volatility on USD/JPY has already jumped from around 7.8% to 9.5% this morning. This makes buying USD/JPY put options an attractive strategy to position for a potential downward move.
Technically, USD/JPY is still caught in a range, but the fundamental argument for a breakdown is growing. We should watch the pair’s 200-day moving average, currently around 146.50, as a critical support level. A sustained break below that could open the door for a test of the lows we saw near 144.00 earlier this summer.
