BoJ holds rates, yen gives up gains

The Japanese yen climbed 0.50% earlier against the US dollar but was unable to consolidate these gains. In the European session, USD/JPY is trading at 147.92, down 0.04% on the day.

Bank of Japan delivers hawkish hold

The Bank of Japan maintained its key interest rate at 0.50% at today's meeting. The non-move was widely expected by the markets. What was a surprise was the split vote, as two of the nine members voted in favor of a rate hike, indicating some support for a more hawkish montary policy.

Governor Ueda has been cautious and has the markets guessing as to when the BoJ will raise rates. The markets have priced in a 59% chance of a rate hike before the end of the year, up from 50% a week ago, according to LSEG.

The policy statement noted that the domestic economy had "recovered moderately" but was still showing signs of weakness. Members also expressed concern that exports will be hurt by US tariffs, with Japan facing a 15% tarriff on most of its exports to the US.

On the inflation front, the statement said that underlying inflation is weak but is expected to increase gradually and reach the 2% inflation target.

After years of deflation, prices are moving higher, which has led to expectations that a rate hike is just a question of timing. Consumer inflation is running between 2.5-3%, above the BoJ's 2% target. The central bank has stressed that it wants to see sustainable underling inflation at around 2% before the next rate hike.

The BoJ is also concerned about the political turmoil in Japan. Prime Minister Ishiba recently resigned and the ruling Liberal Democratic Party is holding an election to choose a new leader.

• USDJPY tested support at 1.4777 and 147.51 earlier
• There is resistance at 148.12 and 148.38