USD/JPY steady as traders eye BoJ interest rate decision

• USD/JPY hovers near 144.20 as traders await the Bank of Japan’s rate verdict on Tuesday.
• Policy divergence from the US Federal Reserve underpins the US Dollar's strength against the Yen.
• Any hawkish surprise from the BoJ could cap USD/JPY upside and support Yen demand.

The Japanese Yen (JPY) is treading water against the US Dollar (USD) on Monday as traders sit on the sidelines ahead of the Bank of Japan’s (BoJ) policy announcement, scheduled for Tuesday. The USD/JPY pair is struggling to advance further after Friday’s gains, which were underpinned by heightened Israel-Iran tensions, and stays confined within a narrow range.

At the time of writing, the pair hovers near 144.20, close to its 21-day Exponential Moving Average (EMA) at 144.19. Intraday moves have been limited so far, with the day’s high marked at 144.75. The low at 143.65 reflects a cautious market mood in the run-up to the BoJ outcome.

Markets broadly expect the Bank of Japan to keep its benchmark rate unchanged at 0.50% on Tuesday, mirroring its last policy decision on May 1 when it left rates steady and downgraded its growth outlook amid persistent global risks. Governor Kazuo Ueda has signaled that the central bank wants clear evidence of sustained wage growth and stable inflation before committing to another rate hike. Meanwhile, there is growing speculation that the BoJ may announce a slower pace of bond purchases as part of its gradual policy normalization path.

Under the current plan, the BoJ has been reducing its monthly buying of Japanese government bonds by about ¥400 billion each quarter, with this program scheduled to run through March 2026 and continue for about a year thereafter. The central bank is expected to discuss possible adjustments beyond April 2026 at this week’s meeting. While some policymakers are open to halving the reduction pace to ¥200 billion per month, others prefer maintaining the current pace, citing stable market conditions since the tapering began in August 2024.

This careful approach highlights the widening policy gap with the United States Federal Reserve (Fed), which is expected to hold rates steady this week but remains in no rush to cut borrowing costs despite signs of cooling inflation.

Beyond the immediate rate call, traders will closely monitor Governor Ueda’s post-meeting remarks and the updated economic forecasts for signals on the timing of any further monetary tightening. Clear hints of steady wage gains or persistent price pressure could bolster expectations for another rate hike later this year, offering fresh support to the Yen. On the other hand, a dovish tone and soft growth projections may reinforce policy divergence with the Fed, keeping USD/JPY buoyed near current highs in the near term.