During Friday's Asian trading session, the USD/JPY pair continued to fluctuate in a consolidating range, with market focus shifting to the Bank of Japan's monetary policy meeting. In the previous trading day, the yen experienced a rare rapid rebound, with USD/JPY falling from above 163 to below 158 within minutes, sparking speculation that Japanese authorities may have intervened in the foreign exchange market.
This sharp volatility has altered the market's previous focus regarding the BOJ meeting. Earlier, investors widely believed the BOJ would likely keep its policy rate unchanged at this meeting, but after the yen's sudden strength, markets are paying more attention to the central bank's stance on exchange rate movements, inflationary pressures, and the future path for rate hikes. The BOJ is expected to maintain its policy rate at 1% after the meeting concludes. The market believes that after implementing a rate hike in June, the BOJ needs time to observe the impact of tightening policies on economic activity, corporate investment, and consumer demand, making another rate adjustment in the near term unlikely. However, investors still anticipate that the BOJ may continue tightening policy this year, with the October and December meetings seen as potential windows for rate increases.
This meeting will also release the latest quarterly economic outlook report, including growth and inflation forecasts. The market expects the BOJ to raise its economic growth forecast, mainly due to relatively stable domestic economic performance and increased investment demand related to artificial intelligence, which supports corporate capital expenditure. However, the BOJ may slightly lower its overall inflation forecast due to the impact of government subsidy measures and falling energy prices on consumer prices. Nevertheless, the market believes that even if inflation forecasts are revised down, it does not necessarily signal a dovish policy shift. The BOJ is still likely to emphasize that underlying inflationary pressures persist, especially as import costs and producer price increases are gradually being passed through to consumers.
Corporate inflation expectations also provide grounds for the BOJ to continue tightening policy. The latest corporate survey shows that Japanese companies expect inflation to remain above the central bank's 2% target over the next few years. Meanwhile, continued wage growth trends and resilient services sector price pressures are making policymakers more confident that Japan's economy is forming a more stable wage-price cycle. The yen's prolonged weakness is also a key factor for the BOJ. A weaker yen raises the cost of imported goods and energy, potentially further fueling domestic inflationary pressures. Although the market believes that suspected intervention by Japanese authorities has eased short-term pressure on the yen, past experience shows that without monetary policy support, the yen's weakening trend may reemerge.
The BOJ does not directly target the exchange rate as a policy objective, but Governor Kazuo Ueda may emphasize that the central bank is closely monitoring the impact of exchange rate fluctuations on import prices and the inflation outlook. If the BOJ sends clearer hawkish signals, such as highlighting wage growth, upside inflation risks, or the impact of yen depreciation, the market may front-load expectations for an October rate hike. Conversely, if Ueda focuses more on weak consumption, global growth risks, and avoids clearly discussing the timing of the next rate hike, the market may delay rate hike expectations to December, thereby undermining the yen's recent rebound momentum.
Currently, the market believes the future trajectory of USD/JPY will be influenced by both the BOJ's policy signals and the movement of the US dollar. The Federal Reserve kept interest rates unchanged for the fifth consecutive meeting, which was in line with expectations. However, as investors have reduced bets on surprise rate hikes, the US dollar index has come under pressure, providing some external support for the yen's rebound. If the BOJ delivers hawkish signals while the US dollar continues to weaken, USD/JPY may decline further, as expectations for narrowing interest rate differentials between the two countries would strengthen. Conversely, if the BOJ remains cautious and the market refocuses on US economic data, USD/JPY could see a technical rebound.
From a daily chart perspective, USD/JPY's short-term trend has clearly turned bearish after the sharp decline, with the price currently trading around 160.80 and short-term bearish pressure increasing. However, the medium- to long-term uptrend structure has not been completely broken, and the price is currently testing a key support zone. The focus below is on the 158.00 area, which is also close to the 200-day moving average at 157.94 and the uptrend support line at 157.77. If this zone holds effectively, the pair may stage a corrective rebound. If the daily close breaks below the support around 157.70, it would indicate that the previous uptrend could enter a deeper correction phase. On the upside, initial resistance is seen at the 161 region, with stronger resistance at the previous high of 163.99. On the technical momentum front, the RSI indicator has approached the 30 level, suggesting the market has entered a short-term oversold zone, potentially limiting further downside, but the trend remains cautious until the pair reclaims key moving averages.
On the 4-hour chart, USD/JPY has entered a consolidation phase after the rapid plunge, with short-term selling pressure easing, but it remains within a downward channel. Technical indicators show that short-term momentum indicators have recovered somewhat from extreme weakness, indicating a potential for a rebound. If the pair can break back above the 161 region, it could test the 162.50 resistance in the short term. However, if the rebound fails to break through key moving average resistance, the price could fall back to test support at 158.00 again. The short-term direction will largely depend on whether the BOJ signals further tightening and the market's assessment of the sustainability of FX intervention.
The sharp drop in USD/JPY marks the market refocusing on Japan's policy shift and exchange rate risks. Although the BOJ is not expected to adjust rates immediately, the yen's rapid appreciation has already changed market expectations. Governor Ueda's stance on the future pace of rate hikes will be a crucial factor determining the pair's direction. In the near term, if the BOJ reinforces its assessment of inflation and wage growth, while the US dollar remains under pressure, USD/JPY could continue its adjustment trend. However, if the BOJ stays cautious and the market begins to doubt the effectiveness of intervention, the yen's rally could face a pullback risk. Going forward, investors need to focus on the BOJ's policy language, US economic data performance, and changes in the yen exchange rate. The market is currently shifting from simply focusing on carry trades to reassessing the normalization process of Japan's monetary policy, suggesting USD/JPY may enter a period of high volatility.
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