What to expect from the upcoming BOJ interest rate announcement: possible scenarios for the USD/JPY exchange rate

• At the previous meeting, the Bank of Japan kept the key rate negative.
• Governor Kazuo Ueda is expected to raise the short-term rate from −0.1% as early as next week, which would be the first rate hike in Japan since 2007.
• Should the Bank of Japan announce further rate hikes, USD/JPY will likely fall below 146.

The Bank of Japan (BOJ) will announce its interest rate decision at the meeting on 19 March. The rate is expected to rise and come out of its negative value for the first time in eight years.

The BOJ announced negative rates in January 2016 to overcome deflation and stimulate economic growth to achieve a sustainable price growth rate of 2% over the long term. Interest rates have been held at −0.1% for eight years. At its most recent meeting on 22 January 2023, the BOJ left the discount rate at −0.10% and the soft cap on the 10-year government bond yield at 1.00%. According to the data, the central bank has not yet reached the stage where Japan can avoid the risk of a return to deflation.

The highest inflation rate in the past three years was seen in January 2023 at 4.3% per annum. Since then, Japanese financial institutions have managed to halve the inflation rate. By January 2024, it was at 2.2% per annum, almost reaching the 2% target the BOJ aims for—a potential reason to consider an interest rate hike. Meanwhile, factors such as a technical default on government bonds and the announcement of union wage hikes made at the meeting on 13 March also suggest there is a possibility that the BOJ may take the opportunity to raise rates.

‘Japan's economy continues to recover moderately, and encouraging signs of wage growth this year increase the chances of a rate hike,’ said Kar Yong Ang, a financial market analyst at Octa. He added that tighter monetary policy could trigger a rate hike over the following calendar year.

On 13 March, USD/JPY came close to 148. If the BOJ does not announce the expected policy adjustment, it will encourage buyers, and their first target will be around 149, where the local resistance is located. If the BOJ takes action and announces further rate hikes, USD/JPY will likely fall below 146. This could be followed by an attempt to reach the lows of late last year.