Japanese Yen under pressure as markets await BoJ decision and Japan CPI

• USD/JPY extends gains for a second day as the US Dollar firms.
• The Fed cut rates by 25 bps, as widely expected, while signaling a gradual easing path.
• Focus now turns to Japan's CPI and the BoJ interest rate decision on Friday.

The Japanese Yen (JPY) trades on the defensive against the US Dollar (USD) on Thursday, with USD/JPY extending gains for a second straight day after briefly sliding to its lowest level since July 7 in the immediate aftermath of the Federal Reserve's (Fed) interest rate decision.

At the time of writing, USD/JPY is trading around 148.00, up nearly 0.75% on the day, supported by a firmer Greenback while investors await Friday's twin risk events, Japan's National Consumer Price Index (CPI) and the Bank of Japan's (BoJ) interest rate decision.

The BoJ is widely anticipated to keep its policy rate unchanged at 0.50% on Friday, with investors focused on Governor Kazuo Ueda's forward guidance. Japan's economy has shown resilience, with Q2 Gross Domestic Product (GDP) revised up to 2.2% annualized and the output gap turning positive (+0.3%) for the first time since 2023, signaling stronger domestic demand.

Inflation also remains above target, with core measures hovering near 3%, though the central bank projects a gradual slowdown toward 2% over the coming year.

Despite stronger growth and above-target inflation, the BoJ is unlikely to rush into tightening. Real wages remain under pressure, limiting household demand, and the added political uncertainty from Prime Minister Shigeru Ishiba's resignation reinforces expectations that the central bank will adopt a cautious tone, with October or December still viewed as the next potential windows for a rate hike.

Friday's August CPI report will be crucial in gauging whether inflation pressures are continuing to ease. Headline inflation eased to 3.1% YoY in July, down from 3.3% in June. The core index excluding fresh food also slipped to 3.1% from 3.3%, and is forecast to cool further to 2.7% in August, suggesting softer underlying momentum. In contrast, the core-core measure, excluding both food and energy, remained steady at 3.4% in both June and July, highlighting sticky domestic price pressures.

Against this backdrop, monetary policy divergence remains in focus. The Fed cut interest rates by 25-basis-point (bps), marking its first reduction since December 2024 and signaling a gradual easing path ahead. In contrast, the BoJ is taking a more cautious approach, keeping policy unchanged for now but leaving the door open to future tightening as inflation persists above target.