USDJPY fell sharply in the third quarter of 2024 due to expectations of further rate hikes. Because of the new political situation and slightly weaker data, the Bank of Japan decided to hold off on any immediate action at the time. Now, the data increasingly favors a rate hike, and both the BOJ Chair and Vice Chair have signaled that this meeting will include a discussion of a rate increase. The translation of this is that rates will most likely be raised by 25 basis points. 

Markets, as expected, have already priced in this hike with a 95% probability in the swap market. Since this news is largely priced in, it is unlikely to have a significant impact at tomorrow’s meeting, unless, of course, the BOJ surprises the markets by holding rates steady. 

BOJ watchers will focus on Governor Ueda’s comments for clues about further rate hikes. The swap market currently reflects expectations for just one more rate hike for the remainder of 2025. If Ueda’s remarks signal caution, it would align with market expectations. Ultimately, the tone of hawkishness or dovishness in his statement will play a key role in determining the future direction of USDJPY. 

(USDJPY Daily Chart) 

USDJPY has been contracting within a rising wedge formation since the dip in September. The surge in the Dollar Index and the BOJ’s reluctance to implement rate hikes have helped the currency regain most of the losses incurred during the summer of 2023. However, rising wedge formations tend to break downward, suggesting that the dollar’s dominance over the yen might be nearing its end in the medium term. 

For the rest of the week, 155 is the key support level, while the 159-160 zone serves as critical resistance. As long as these levels hold, USDJPY’s contraction is likely to continue. A break below 155 could trigger a move toward 151 in the coming days. On the other hand, a breakout above 160 remains uncertain due to the potential risk of another FX intervention by Japan.