BOJ Faces Tough Call as Inflation Pressures Mount Ahead of Policy Decision

Japan’s latest inflation data has raised the stakes for the Bank of Japan’s policy meeting, with wholesale prices climbing at their fastest annual pace in nine months. Producer prices surged 2.4% year-on-year in May, up sharply from 1.1% in April and surpassing consensus forecasts of 2.0%. The figures underscore how a weak yen is inflating import costs, complicating the BOJ’s path forward.

Policy Outlook

The BOJ will conclude its two-day meeting on Friday and is widely expected to keep its short-term policy rate anchored in the 0%–0.1% range. Yet, the stronger inflation print adds nuance to the debate over future tightening. Governor Kazuo Ueda has signaled that the central bank is prepared to consider additional hikes if it becomes confident that underlying inflation can sustainably hold near the 2% target.

Yen Dynamics

The yen’s persistent weakness remains a double-edged sword: while it boosts export competitiveness, it also drives up the cost of imported goods and energy, intensifying domestic inflation pressures. This tension is feeding speculation about whether policymakers may adopt a more hawkish tone in their forward guidance.

Technical Outlook for USD/JPY

In FX markets, USD/JPY has rebounded strongly following the FOMC’s latest decision, erasing losses seen after the U.S. CPI release. The pair has broken above the 20-, 50-, 100-, and 200-hour Exponential Moving Averages on the 4-hour chart, reinforcing bullish momentum. Key resistance is now eyed near 158.20, with support at 156.30.

Market Implications

Traders expect Friday’s announcement to inject volatility into yen markets, with the BOJ walking a fine line between maintaining supportive conditions for growth and addressing the risks of prolonged inflation. The outcome will likely shape USD/JPY direction into the summer, alongside U.S. rate expectations.