BoJ Policy Inertia Sparks Yen Depreciation Amid US Dollar Strength

The Bank of Japan's (BoJ) stance on monetary policy has kept the Yen under pressure, as investors weigh the central bank's intentions to continue rate hikes against the potential for a resurgence in inflation.

At its July meeting, the BoJ maintained its policy rate at 1.00% and upgraded its economic outlook, signaling further rate hikes to combat core inflation that may overshoot its 2% target. Despite this, the broader economic outlook remains strong, driven by solid labor market dynamics and robust wage growth.

The BoJ projects 2026 real GDP growth at 0.6%, but has revised downward its headline inflation forecast from 2.8% to 2.5%. However, recent inflation figures show signs of re-acceleration as energy price declines moderate and select subsidies expire, aligning with underlying market realities.

This perceived policy inertia by the BoJ has triggered market disappointment and JPY depreciation, despite three direct market interventions by the Ministry of Finance this year. The US dollar's strength, driven by lingering expectations of further Fed rate hikes, has also acted as a major tailwind for the pair's upside, with the US-Japan 30-year sovereign yield spread widening sharply to 2.83%.