Markets price 60bps of BoJ tightening over 12 months as Japan’s growth and inflation data support a gradual rate path.
USD/JPY trades near multi-decade highs but consolidation reflects expectations of Bank of Japan policy shifts. Japan’s private sector growth hit a five-month high in July, with manufacturing output rising at the fastest pace since February 2014, bolstering the BoJ’s hawkish stance.
June CPI data showed headline inflation at 1.7% year-over-year, up from 1.5% in May, while core CPI excluding fresh food rose to 1.6%. However, core CPI excluding both fresh food and energy dipped to 1.7%, below the BoJ’s 2026 forecast of 2.8%, signaling a measured tightening cycle.
The BoJ is expected to hold rates at 1.00% next week, with swaps pricing a 25bps hike by year-end and 60bps of total tightening over 12 months. This repricing is seen as supportive for JPY, limiting further upside in USD/JPY.