As of the time of writing, the USD/JPY pair was trading near a 40-year high. Investors remain cautious ahead of the Federal Reserve’s monetary policy decision, to be announced on Wednesday, as well as the Bank of Japan’s announcement on this topic on Friday.
The lack of immediate catalysts keeps the exchange rate in wait mode, as markets seek more clarity regarding the prospects of both central banks. The US dollar is trendless ahead of the Fed meeting, while the Dollar Index (DXY), which tracks the dollar’s value against a basket of six major currencies, has slightly corrected from its July peak.
According to the CME FedWatch tool, the probability that the Fed will keep interest rates unchanged in the range of 3.5%-3.75% is around 62%, while maintaining a high likelihood of an increase at the September meeting.
At the previous meeting, Fed Chair Kevin Warsh indicated that future forecasts “do not quite align with the current political environment,” implying that policymakers are unlikely to provide significant signals regarding the future direction of interest rates. Nevertheless, market participants should closely monitor any hints about how long inflation in the US will remain above the central bank’s target level of 2%.
In Japan, attention is focused on the BoJ’s monetary policy decision expected on Friday. Markets expect the central bank to keep its interest rate at 1%, maintaining a firm position on future monetary policy, as inflation remains within the framework of gradual normalization.
Thus, the key point for investors is the divergence in monetary policy between the US and Japan. Until the Fed and the BoJ provide their decisions, the USD/JPY exchange rate is likely to remain within the current range as traders exercise caution and avoid sharp positions ahead of these important events.
BNP Paribas strategists expect Japan’s economic growth rate to slow slightly, forecasting annual GDP growth of 0.8% in 2026 compared to 1.1% in 2025. In a slowing economic growth environment, they note that the BoJ has already begun normalizing its policy, initiating a cautious adjustment in 2024 by raising the policy rate to 1.0% (from previously negative)—the highest level since 1995. BNP Paribas anticipates that this gradual approach will continue, projecting a 25-basis-point increase approximately every four to five months until reaching a terminal rate of 2.50% by 2028.
On the currency market, DBS highlights that the USD/JPY pair remains at high levels but describes this movement as increasingly tiring, stating that the pair is “weary of discussions among Japanese politicians about supporting their currency through interventions and more gradual rate hikes.”
From a technical perspective, the pair finds support at the 9-day EMA, while aiming to surpass the 40-year high. Oscillators are positive, but the relative strength index is close to the overbought zone, indicating bullish consolidation. Meanwhile, the path of least resistance remains upward.
The table below provides the percentage change of the Japanese yen against major currencies for Tuesday. The Japanese yen has demonstrated the strongest strengthening against the Australian dollar.
