Yen Near Lows as Markets Await Bank of Japan Rate Decision, Euro Slips After ECB Signals Caution

The Japanese yen hovered near multi-month lows on Friday as global currency markets waited for the Bank of Japan’s interest rate decision and guidance on future monetary tightening. The dollar traded around 155.6 yen in early Asian hours, not far from the yen’s 10-month low near 158 reached in November. Investor sentiment toward the yen remains fragile amid concerns over Japan’s fiscal health and the perception that policymakers have been slow to raise interest rates.

Market participants are almost fully pricing in a 25 basis point hike by the Bank of Japan, which would lift the short-term policy rate to 0.75%. Expectations were reinforced by comments earlier this month from Governor Kazuo Ueda. However, traders are focused less on the rate hike itself and more on Ueda’s tone and outlook during his press conference, as this will shape expectations for further tightening into next year. According to Reuters sources, the BOJ is unlikely to release updated estimates of its neutral rate, instead relying on verbal guidance to communicate its policy path.

Strategists note that while a rate hike is overdue based on economic fundamentals, it may not be enough to trigger a sustained yen rally. If policymakers signal that the next move is still far off, the currency could remain under pressure. A surprise decision to hold rates steady could spark sharp volatility in USD/JPY and potentially force authorities to consider direct market intervention.

In broader foreign exchange markets, the euro edged slightly lower after the European Central Bank left interest rates unchanged at 2%. ECB President Christine Lagarde avoided offering forward guidance and emphasized flexibility, pushing back against more hawkish expectations. The euro traded near $1.17, while analysts said the ECB’s balanced tone reduced confidence that the next policy move would be a rate hike.

The U.S. dollar briefly weakened overnight following an unexpected drop in U.S. inflation, though doubts over data reliability during the government shutdown limited the move. Sterling was volatile after the Bank of England cut rates to 3.75% as expected, while the Norwegian krone strengthened modestly after its central bank signaled no urgency to ease policy. Elsewhere, the Chinese yuan remained firm, the South Korean won stayed under pressure, and bitcoin traded steadily below $90,000.