USD/JPY Outlook : BOJ Holds Policy Steady as Focus Shifts to Ueda

The Bank of Japan left policy unchanged in January, holding the overnight call rate at 0.75% in a widely expected decision. While inflation language was modestly firmed and growth forecasts were upgraded, markets treated the outcome as largely neutral. With rate expectations already well priced, attention now turns to Governor Ueda’s press conference, which may prove more influential for near-term USD/JPY direction.

From a technical perspective, USD/JPY remains in a well-defined uptrend, though momentum indicators suggest upside strength is moderating near historically sensitive levels.

BOJ Decision and Policy Signal

The BOJ voted 8–1 to keep rates unchanged, with Takata again dissenting in favour of further tightening. However, the lack of broader support meant the dissent did not materially alter the policy signal. Unlike November, when multiple dissents preceded a rate hike, the current vote reinforced the view that the bank is comfortable proceeding gradually.

Policy communication reflected increased confidence in inflation durability. References to sluggish underlying inflation were removed, replaced by language highlighting moderate inflation gains supported by reinforcing wage and price dynamics. Labour market tightness was also framed as more structural rather than conditional, marking a subtle but meaningful evolution in tone.

At the same time, risk assessments were softened. Growth and inflation risks are now judged broadly balanced, and external risks, including trade uncertainty, were acknowledged but no longer treated as dominant headwinds.

Forecast Updates

Inflation forecasts were broadly stable, with only marginal upward revisions. Core CPI projections for FY2025 and FY2027 were left unchanged at 2.7% and 2.0%, while the FY2026 forecast was nudged slightly higher to 1.9%. The alternative core measure excluding fresh food and energy saw more notable upgrades for 2025 and 2026, reflecting firmer near-term price pressures.

Growth expectations were also revised higher, with real GDP forecasts lifted to 0.9% for 2025 and 1.0% for 2026. These adjustments support the case for continued policy normalisation, but not at an accelerated pace.

Market Reaction and Forward Guidance

Markets showed little reaction to the decision or forecast changes. Rate swaps continue to price another 25bp hike by mid-year, with a second increase expected by year-end, implying a terminal rate near 1.25%. USD/JPY remained steady, while the JGB curve continued to flatten modestly.

With policy expectations largely anchored, Governor Ueda’s remarks now carry greater importance. His recent tendency to lean cautious and dovish in post-meeting communication leaves room for USD/JPY upside should that pattern persist.

USD/JPY Technical Outlook

USD/JPY remains in a strong weekly uptrend, having rebounded sharply from support near 154.45 in December and recently trading as high as 159.45. The 158.76 zone stands out as a key near-term inflection level, having acted as both support and resistance historically.

A sustained break above last week’s high would expose the June 2024 swing high near 161.95. On the downside, trend support comes in around 157.50, an area that has repeatedly attracted buyers in recent sessions.

Momentum indicators remain constructive but less aggressive. RSI is holding near overbought territory without accelerating, while MACD remains positive but is flattening. This combination points to upside bias with increasing sensitivity to positioning and intervention risk.

USD/JPY Weekly Chart

Bottom Line

The BOJ continues to move cautiously, balancing firmer inflation dynamics against a desire to avoid tightening too quickly. With policy largely priced, USD/JPY direction now hinges on communication rather than decisions. Technically, the broader trend remains higher, but with prices operating near historically sensitive levels, volatility risks are elevated. As always, speed rather than level will be key in shaping intervention expectations.