The yen slightly reduced its decline against the dollar when the Bank of Japan maintained its policy interest rate and mentioned a positive cycle of wages and prices strengthening, while also monitoring global trade conditions.

During midday in Tokyo, Japan's currency was down 0.1% at 149.42 against the dollar, having previously dropped to 149.64 before the BOJ announcement. Despite expectations from all economists surveyed by Bloomberg News for the BOJ to keep rates unchanged, last week the yen had reached a five-month peak.

In its latest statement, the BOJ included reference to the evolving trade situation and other policies as additional risks to the economic outlook. Despite having raised rates three times since becoming the last central bank to move from a negative interest rate in the previous year, they emphasized the need to sustain the stance on rate hikes to prevent excessive yen depreciation, while ensuring clear communication to manage expectations.

Although the yen has demonstrated renewed strength in 2025 after four consecutive years of weakening, uncertainties surrounding the global economy and domestic politics may influence the timing of the BOJ's next actions. There's a possibility that speculators could adjust their net long positions in the Japanese currency, which are currently at a record high, if indications of a delayed rate hike emerge from BOJ Governor Kazuo Ueda's upcoming press conference.

The recent BOJ statement, while not as cautious as predicted and maintaining a neutral position, could make further yen selling challenging, according to Yujiro Goto, head of FX strategy at Nomura Securities Co.

Rumors of additional rate hikes have driven Japan's government bond yields to their highest levels in almost twenty years, as investors foresee a continued narrowing of the yield gap between the US and Japan. Market indicators suggest a 71% probability of a rate increase by July, with certainty by October.

Market participants will closely follow Ueda's remarks on the bond market, even though previous statements indicated minimal concern about rising yields. Additionally, the political landscape in Japan will be scrutinized, with speculation arising about a potential shift in leadership. The yen may face pressure if reflationist Sanae Takaichi emerges as a leading candidate to replace Prime Minister Shigeru Ishiba, whose popularity plummeted following the distribution of vouchers to lawmakers.