Bank of Japan Meeting Looms as Yen Hits 40-Year Lows

July 28, 2026 · Macro · CryptoRefuge Team

The Bank of Japan's next interest-rate meeting is set to take place this week, with the yen having recently hit 40-year lows against the US dollar, reaching a high of 164 USD/JPY. The market-implied probability of a rate hold stands at 98%, with odds of no change at 99%, as the Bank of Japan is expected to maintain its benchmark rate at 1.0%. This decision is crucial, given Japan's persistent current account and trade surpluses in earlier decades, as well as systemically low interest rates.

164 USD/JPY, the current exchange rate, is a key level to watch, with the yen having depreciated significantly against the US dollar. 40 years since the yen last reached such lows against the US dollar, highlighting the significance of the current situation. The Bank of Japan's decision will be closely watched, particularly in light of Japanese inflation picking up in 2022, with the country's CPI inflation target set at 2%. 2% CPI inflation target, a key metric for the Bank of Japan's monetary policy decisions. 1995, the last time the benchmark rate was at 1.0%, highlighting the historical context of the current interest-rate environment.

The yen carry trade, which has been a significant factor in the currency's depreciation, "only works if two conditions remain intact: Japanese interest rates remain exceptionally low, and the yen remains broadly stable or continues depreciating."

"That trade only works if two conditions remain intact. Japanese interest rates remain exceptionally low. The yen remains broadly stable or continues depreciating." — Ricky Ho, analyst The Bank of Japan has also emphasized the importance of considering the impact of exchange rate developments on prices, stating that "attention should also be paid to the point that, with firms' behavior shifting more toward raising wages and prices recently, exchange rate developments are, compared to the past, more likely to affect prices, and that such moves could affect underlying CPI inflation through changes in inflation expectations."

Analysis: If the Bank of Japan decides to hold the interest rate, it may lead to further depreciation of the yen, potentially affecting the country's inflation outlook. A break below the key level of 160 USD/JPY could signal a significant shift in market sentiment, while a move above 164 USD/JPY could indicate a continuation of the yen's depreciation. The Bank of Japan's interest-rate decision will have significant implications for the global markets, especially the yen carry trade, and will be a key factor in determining the direction of the USD/JPY exchange rate in the coming weeks.