The Bank of Japan is expected to keep interest rates steady after its two-day meeting. This decision comes against a backdrop of easing trade tensions following a deal with Washington. The bank has not specified the exact timing of its announcements, which are expected between 02:30 and 03:30 GMT. Governor Kazuo Ueda’s press conference at 06:30 GMT will be important for clues about possible rate hikes later this year. Policymakers are weighing the risks to growth from U.S. tariffs against rising inflation, especially due to increasing food prices.

Bank of Japan Inflation Forecast

The BoJ may raise its inflation forecast for this fiscal year. However, it still expects core inflation, driven by domestic demand, to remain below 2%. Even with a slightly softer outlook on economic risks, the bank is likely to highlight uncertainty from higher U.S. tariffs affecting business sentiment. The Bank of Japan is poised to keep short-term rates at 0.5%, balancing improved economic conditions with global risks. The USD/JPY currency pair rose following the Federal Open Market Committee meeting. This week, the Bank of Japan is likely to maintain its short-term interest rate at 0.5% in a sign of cautious optimism after the trade agreement with Washington earlier this year. This suggests a period of stability in the short term and indicates a “wait-and-see” approach from policymakers.

Looking Back: The Historic End

Reflecting on the end of negative interest rates in March 2024, the current pause is part of a gradual normalization process. The USD/JPY exchange rate is holding around 155 after the last U.S. Federal Reserve meeting, making Governor Ueda’s press conference a key event. Any hints about timing for future rate hikes will be the main focus for the market. Inflation pressures are rising, with Japan’s core CPI for June 2025 at 2.3%, exceeding the bank’s 2% target for the third month in a row. The BoJ will likely adjust its inflation forecast upward in its upcoming report. However, it is expected to continue stating that this rise is not driven by strong domestic demand. For derivative traders, this implies that short-term volatility may be overpriced. With the hold on rates nearly certain, selling one-week USD/JPY options could be a good strategy, as implied volatility for this period is already below 7%. The key event will be not just what the BoJ does, but what it says about future plans. An interesting strategy might be to position for a possible policy shift later this year. Policymakers have indicated they will resume tightening once uncertainties diminish. We see value in purchasing options that expire in the fourth quarter of 2025, where implied volatility remains above 9%. This allows traders to get ready for a potential rate hike when the bank feels more secure about the economic outlook. Create your live VT Markets account and start trading now.

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