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At its latest meeting, the Bank of Japan kept all key policy settings unchanged, effectively implementing the most expected baseline scenario—despite earlier conflicting statements from central bank officials.
The yen reacted negatively to the outcome of the May meeting. The key points in the Bank's statement and Governor Ueda's comments were much more dovish than markets had anticipated. As a result, the yen came under pressure, and the USD/JPY pair surged over 200 pips, firmly holding within the 145 range. Despite this strong upward movement, entering long positions on the pair remains risky, given the yen's role as a safe-haven asset. In my view, traders will likely price in the outcome of the BoJ meeting quickly—within the next few days—and refocus on the broader context of the U.S.-vs-the-world tariff standoff.
To sum up the May meeting in two words: pessimism and uncertainty. The BoJ downgraded its January forecast for Japan's economic growth in the current fiscal year (April 1, 2025, to March 31, 2026) from 1.1% to 0.5%—a substantial revision. It also lowered its inflation forecast from 2.4% to 2.2%, primarily due to falling import prices and slower domestic growth.
To recall, Japan's headline CPI rose 3.6% y/y in March, which is in line with forecasts, while the core index accelerated to 3.2%. The CPI excluding fresh food and energy—one of the BoJ's key inflation gauges—also rose, hitting 2.9%, up from 2.6% in February.
Given these inflation trends, markets had expected a more hawkish stance from the BoJ. However, the central bank disappointed, making it clear it would adopt a wait-and-see approach, citing growing uncertainty over U.S. trade tariffs and their potential impact on Japan's economy. As a result, the market no longer sees June as the likely timing for the next rate hike, pushing those expectations into the second half of the year.
According to Governor Kazuo Ueda, the timeline for reaching the 2% core inflation target will be "somewhat delayed." Consequently, the next round of monetary tightening will also be postponed. It's now clear that rate hikes are unlikely at the June or July meetings—meaning they may only come in September, November, or December, or not at all in 2025.
Just a week ago, Ueda had struck a more hawkish tone, hinting at future tightening and stating that real interest rates remain "very low," allowing room for hikes if economic and price conditions align with forecasts. BoJ board member Junko Nakagawa echoed similar views. But as of now, the BoJ appears firmly committed to staying on hold.
This "cold shower" policy disappointed USD/JPY bears and gave momentum to buyers. Comments from Donald Trump, who claimed that potential trade agreements with India, South Korea, and Japan were already in place and that the chances of a deal with China were "very high", added pressure on the yen.
In short, the stars aligned for USD/JPY bulls: a dovish BoJ and risk-on sentiment driven by Trump's optimistic tone reduced demand for safe havens like the yen.
Still, despite the sharp rally in USD/JPY, long positions remain risky, as the dollar is still a vulnerable currency. First, there's no objective confirmation of Trump's claims about U.S.–China trade negotiations. Officials from both the U.S. (Trade Representative Jamieson Greer) and China's Ministry of Foreign Affairs have denied such progress. Second, negotiations with the rest of the countries on Trump's tariff blacklist—more than 60 in total—have either stalled or not yet begun. The 90-day grace period Trump announced expires in just 2.5 months, and so far, Washington hasn't finalized a single deal.
As a result, the fundamental backdrop for USD/JPY is mixed. On the one hand, there are dovish BoJ signals and a rising appetite for risk assets. On the other: no concrete reasons for optimism. If U.S.–China talks don't materialize soon, the old narrative will return, and the dollar will again come under pressure—especially considering recent macro data pointing to a slowing U.S. economy.
Under such ambiguous fundamental conditions, it is most prudent to maintain a wait-and-see approach with USD/JPY.
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