Bank of Japan holds rates unchanged but signals inflation risk🏛️USDJPY loses 0.2%

Despite holding interest rates steady this week, the Bank of Japan (BoJ) is keeping markets on alert with subtle warnings about inflation. Governor Kazuo Ueda highlighted that while the near-term focus remains on downside risks, particularly from U.S. tariffs, persistent cost pressures, especially in food and energy, could warrant action later this year.

• Ueda flagged the potential for a second-round supply shock, driven by elevated rice and food prices and rising oil due to Middle East tensions. If sustained, these forces could entrench inflation expectations, challenging the BoJ’s wait-and-see stance.
• While the BoJ’s policy meeting leaned dovish, the underlying message was nuanced. The central bank is no longer dismissing upside risks. With core inflation at 3.6% in April — well above the 2% target — and rising utility bills and service prices entering the equation, a tightening cycle in late 2025 remains firmly on the table.
• Forecast revisions due July 31 could offer more clarity. Some economists, including JP Morgan and Mizuho, expect the BoJ to raise its price outlook, possibly laying the groundwork for an October hike — especially if inflation expectations among households remain sticky.
• For example, ING sees rate hikes delayed to early 2026 if trade negotiations linger, the central bank's intensified scrutiny of core inflation — and signs that consumers are adapting to price increases — could accelerate the timeline into Q4 2025.

The BoJ is treading carefully, but the tone is shifting into more hawkish. If price pressures prove persistent and political fog lifts, markets could see Japan’s central bank break its pause before year-end. Until then, expect finely balanced messaging and high sensitivity to global shocks. Still, Japan's monetary policy path remains clouded by geopolitical uncertainty, most notably the impact of U.S. trade actions. Trump’s recent tariff announcement derailed a potential July hike, and future moves may hinge on how that narrative unfolds.

USDJPY (H1)

USDJPY pair declines more than 0.2% today, testing EMA50 (the orange line) on hourly interval. We can't rule out the test of the EMA200 and the lower side of the rising price channel.

Source: xStation5