BOJ Interest Rate Forecast: Will a 1.25% Hike Push USD/JPY Toward 150?

The Bank of Japan appears ready to raise the policy rate by 25 basis points to 1.25% at its September 17-18 meeting. The move would lift the borrowing cost to the highest level in 31 years. It would also mark the second increase in only three months. This faster pace reflects concern that inflation could rise above the 2% target of the BOJ. But markets have already priced in the expected hike. The comments by Governor Kazuo Ueda on future interest rates may therefore move the Japanese yen more than the decision itself. In my view, the BOJ may choose a 25 basis point hike and keep the door open to further tightening. This article examines the BOJ interest rates, the inflation risks behind it and the possible impact on USD/JPY.

BOJ Interest Rate Forecast: 1.25% September Hike Expected

The market expects the policy rate to increase from 1.00% to 1.25%. The central bank is optimistic about a moderate recovery in Japan’s economy. It also expects the financial conditions to remain loose after the hike. This suggests that officials do not view a 1.25% rate as restrictive enough to damage growth.

Timing plays a part in the move as well. The BOJ raised rates in June to 1.00% and maintained the rates in July. If rates go up again in September, it would indicate that the tightening cycle has accelerated.

It would also help BOJ keep inflation under control before price growth becomes harder to contain. A gradual approach allows the bank to raise borrowing costs without creating sudden shock for households, companies or the bond market.

An increase of 50 basis points appears unlikely. The data on wages and consumer price growth do not indicate an immediate surge in inflation. The BOJ can thus take a smaller step and observe the impact before taking further action.

Japan Inflation and $100 Oil Keep Further BOJ Rate Hikes in Focus

Inflation remains the main reason for higher interest rates. Producer prices in Japan climbed 7.6% from a year earlier in August. This increase followed the downward revision of the previous 7.7% gain in July and was also above market estimates.

Import prices also rose as the weaker yen and higher energy costs increased the cost of goods coming into Japan. The producers may eventually pass more of these costs on to consumers. That risk gives the BOJ a strong reason to continue tightening.

Consumer inflation appears less severe but the direction is still important. Core inflation has been steadily increasing from 1.4% in May to 1.6% in June and 1.8% in July. It is improving towards the BOJ’s 2% target.

The bank’s economic outlook for July calls for core consumer inflation to be 2.5% in fiscal 2026 and 2.4% in fiscal 2027. It forecasts the CPI inflation rate to gradually slow to 2.0% in fiscal 2028. These projections help to justify additional rate increases but still don’t necessarily call for a quick or steep rate increase.

The yen and oil prices create opposing forces for the BOJ. The yen is more than 6% higher since the joint Japan-U.S. intervention in late July. A stronger currency should reduce import costs and ease some inflation pressure. But Brent crude above $100 may offset that benefit by raising fuel, transport and production costs.

The BOJ will thus continue to depend on data. If businesses continue to pass higher costs onto households, it will have opportunities to increase rates at the October, December and January meetings.

BOJ Rate Hike Impact on the Japanese Yen and USD/JPY

BOJ and Fed Rate Signals Take Center Stage

If the BOJ turns hawkish and raises the interest rate, the USD/JPY would come under pressure. The increase in Japan’s interest rates would reduce the interest rate spread relative to the United States. This may reduce the appeal of trades funded in yen and could push investors to buy the Japanese currency.

But a 25 basis point increase may already be priced in. Therefore, USD/JPY could decline more sharply if Ueda talks at the next couple of meetings about another hike or if he indicates that rates might be raised beyond 1.75%. A dovish press conference might have the opposite effect and move USD/JPY higher.

On the other hand, the expectation of a 25 basis point Fed rate hike in September has increased by 87% after the US inflation data. If both central banks raise rates by 25 basis points, the interest rate gap would remain broadly unchanged.

This could limit the immediate gains in yen. The move in USD/JPY would then depend mainly on which central bank signals a faster pace of future tightening.

USD/JPY Forecast: 152 Support in Focus After Break Below 159

USD/JPY remains under extreme pressure in the short term after failing at the long-term resistance zone of 160-162. The pair produced a high of 163.98 on July 20 but failed to hold it and dropped sharply. This drop indicates that the pair is moving toward the 150 area in the short term to find the next support.

This support is defined by the ascending channel pattern that stretches from the January 2023 lows. If this support holds and bottom forms around 150, it will likely initiate another rally toward 160-162.

The formation of bottoms in December 2023, September 2024 and April 2025 suggests positive price action in USD/JPY. Therefore, a confirmed break above the 162 level will likely open the way to higher levels, possibly reaching 175.

The short-term breakdown in USD/JPY appeared when the bears broke below the 159 level. This was defined as important support by the ascending trend line that stretches from the April 2025 lows.

After breaking below 159, the pair dropped and then retested the breakout area near 160 and then again dropped to $153. The immediate support following this breakdown remains at 152-152.50. But a break below 152 will likely open the way toward the 149-150 zone, which is considered a long-term support area for USD/JPY.

Despite the sharp drop in USD/JPY, the overall price structure remains bullish in the long term. The RSI has reached oversold levels as the pair approaches 152. Moreover, the 50-day SMA remains above the 200-day SMA. This means that if USD/JPY forms bottom near the 150 level and recovers above the 200-day SMA at 158, it may push the pair higher again.

What to Watch Next for the Yen

The BOJ will likely raise the policy rate by 25 basis points to 1.25%. The increase in producer prices and high oil costs support this decision. But the expected hike may not strengthen the yen significantly because markets have already priced it in.

The Fed may also raise rates by 25 basis points which would keep the interest rate gap broadly unchanged. Therefore, the next move in the yen will depend mainly on the guidance of Ueda. A hawkish signal about further rate hikes could strengthen the yen and push USD/JPY lower. A dovish message could have the opposite effect.

USD/JPY may continue to fall toward the 152-152.50 support zone in the short term. A break below this area could open the way to the long term support near 149-150.

However, the RSI has reached extremely oversold levels, which may trigger a rebound. The long term trend for the pair remains bullish. If the pair forms a bottom near 150 and recovers above the 200-day SMA at 158, it could rally toward 162 again. A confirmed break above 162 would open the way toward 175.