- BOJ keeps rates at 0.5%, two dissenters back a hike
- Inflation, GDP forecasts largely unchanged
- Traders price 55% chance of December hike
- Tokyo CPI key release on Friday
- USD/JPY reverses early losses, eyes October highs
Summary
The Bank of Japan (BOJ) held rates steady in October and left key growth and inflation forecasts largely unchanged from three months earlier, helping USD/JPY reverse higher for the session. However, with two board members again voting to increase policy rates, the risk of a hike by year-end remains in place, especially if trade uncertainty continues to diminish.
BOJ Delivers Repeat Performance
As widely expected, the BOJ left overnight rates unchanged at 0.5% in October, voting 7–2 in favour of the decision. Takata and Tamura again voted against the decision, arguing for a second consecutive meeting for an increase of 25 basis points to 0.75%.
Takata suggested there was a clear shift away from the deflationary environment seen in prior decades, adding the bank’s price stability mandate had essentially been achieved. Tamura said risks to prices remained skewed to the upside, meaning policy rates should be set closer to his assessed neutral rate for Japan. That’s the level where policy rates neither add nor detract from economic activity, theoretically keeping inflationary pressures stable.
Neither argument differed from those offered six weeks ago. The risk at this meeting was skewed towards another board member joining the dissenter list, so the fact there wasn’t one largely explains why the yen weakened slightly immediately after the decision while the Nikkei gained.
Key Inflation, GDP Forecasts Largely Unchanged
Source: BOJ
Continuing the theme from the vote, updated growth and inflation forecasts were essentially unchanged. GDP is seen at 0.7% in the year beginning April 2026, with 2027 also unchanged at 1%. Given the lack of movement, the bank’s preferred inflation measure, which excludes fresh food prices, is seen holding two tenths below its mandated 2% target over both years. Excluding fresh food and energy prices, so-called core-core inflation is seen at 2% over both years. The 2026 forecast was revised up a tenth from 1.9% previously.
Given recent signs of disinflationary forces—albeit partly driven by government subsidies—Friday’s Tokyo inflation report for October will attract plenty of attention, not only because it arrives three weeks before the nationwide report but also because traders see the chance of a 25bp hike from the BOJ in December as a coin flip.
December Rate Hike Remains in Play
Source: Bloomberg
As seen in implied swaps pricing in the Bloomberg graphic above, a hike at the final meeting is marginally favoured at 55%. By the time FY26 wage negotiations are in full swing in March, a full hike is essentially priced, with another nearly fully factored in by September. The Tokyo inflation print may influence that pricing substantially, especially if we see a major deviation away from consensus. The ex-fresh food measure is seen lifting a tenth to 2.6%, as is the core-core measure. These are the two important ones to watch, not the headline figure.
Source: TradingView
USD/JPY Bulls Eye Breakout
Source: TradingView
Having been down more than 0.3% before the decision, USD/JPY rallied once it came through, pushing back towards the highs set earlier this month. With RSI (14) trending higher above 50 but not yet overbought, it points to building upside pressure. MACD has confirmed the signal, staging a bullish crossover two weeks ago before also pushing higher. The overall message is one that favours buying dips and bullish breaks.
Should resistance at 153.28 crack, it may be used by some traders as a launchpad for fresh bullish setups, allowing for longs to be established on the break with a stop below for protection, targeting resistance at 154.80 initially.
Bullish setups would only be enhanced if BOJ Governor Ueda provides dovish guidance, as has typically been the case recently. Watch for his hot headlines to hit the tape over the next couple of hours. The meeting between Donald Trump and Xi Jinping currently underway will also be extremely important, with some form of agreement that kicks the can down the road for tougher discussions in the future likely to be welcomed by markets, potentially promoting yen weakness.
Of course, if 153.28 resistance holds or we receive some unexpectedly bullish yen headlines, the level could also be used to establish fresh shorts, allowing for positions to be established beneath with a stop above for protection. 152.00 looms as an initial target given the pair bounced from there on several occasions earlier this week. Below that, 151.00 would likely be the next port of call for bears.
