Japan’s Economic Crossroads: BOJ Rate Hikes, Dollar Pressure, and Market Shifts Ahead

Japan’s economic landscape is in focus as the Bank of Japan (BOJ) prepares for a potential interest rate hike amid cautious market sentiment and ongoing economic recovery. The World Bank remains optimistic about Japan’s growth prospects, citing rising wages and increased consumer spending as key drivers. Meanwhile, global financial markets are closely watching the US dollar, which has slipped ahead of Donald Trump’s second inauguration, with traders bracing for potential policy shifts. As technical indicators suggest bearish momentum for the USDJPY pair, market participants are eyeing key support levels and broader economic developments that could shape the trajectory of financial markets in the coming months.

The Bank of Japan (BOJ) is expected to raise interest rates at its upcoming meeting, barring any major market disruptions from US President-elect Donald Trump’s inauguration. Sources indicate the central bank will maintain its commitment to further rate hikes if economic conditions continue to improve but will refrain from providing explicit guidance on the pace or extent of future increases. Markets have largely priced in a rate hike from 0.25% to 0.5%, the highest level since 2008. While inflation remains a key concern, the BOJ is unlikely to specify a timeline for additional moves, emphasizing the uncertainty surrounding Japan’s economic outlook. Analysts anticipate further hikes later this year, but the central bank remains cautious, focusing on wage growth and inflation stability before making further policy adjustments.

The World Bank expects Japan’s economy to achieve steady growth over the next two years, driven by rising wages and increased consumer spending. The bank forecasts Japan’s GDP to grow by 1.2% in 2025 and 0.9% in 2026. Deputy Chief Economist Ayhan Kose stated that with wage growth outpacing inflation, consumer spending is likely to boost economic performance. He also noted that the Bank of Japan has room to raise interest rates further if necessary. Kose highlighted uncertainties surrounding the incoming US administration’s trade policies, warning of potential economic fragmentation, particularly for developing countries.

The US dollar weakened against major currencies as traders trimmed bullish bets ahead of Donald Trump’s second inauguration. A Bloomberg index tracking the dollar fell by 0.3% following Trump’s call with Chinese President Xi Jinping, which eased trade tension concerns. Thin liquidity due to a US holiday contributed to the greenback’s decline, with risk-sensitive currencies like the Australian and New Zealand dollars gaining. Market expectations are high for Trump’s upcoming policy announcements, but analysts caution that failure to meet these expectations could further impact market sentiment and the dollar’s performance.

The USDJPY pair has retraced from its recent high of 158.864 recorded on January 10, reflecting increasing bearish sentiment amid the anticipation of policy developments following President-elect Trump’s inauguration. The pair has moved below both the 20-period and 50-period Linear Weighted Moving Averages (LWMAs), reinforcing downward pressure in the market. While the shorter LWMA has yet to cross below the longer LWMA, the prevailing trend suggests a growing bearish momentum.
Technical indicators further support this outlook, with the Momentum oscillator remaining below the critical 100 threshold and the Relative Strength Index (RSI) positioned below the 50 baseline, signaling sustained selling pressure. Should the current downtrend persist, traders are likely to target key support levels at 154.757, followed by 153.544 and 152.751.

As Japan navigates a period of economic recovery and policy adjustments, market participants remain focused on key developments such as the Bank of Japan’s potential rate hike and the broader impact of rising wages on consumption. The World Bank’s positive growth outlook underscores the resilience of Japan’s economy, though uncertainties surrounding global trade policies persist. Meanwhile, the US dollar faces near-term pressure ahead of Donald Trump’s inauguration, with investors seeking clarity on his economic agenda. Technical indicators suggest bearish sentiment for the USDJPY pair, with traders closely monitoring key support levels.