The Japanese yen edged slightly lower against the US dollar during Thursday's Asian trading session, poised to break a three-day losing streak as the exchange rate hovered around the 156.00 level. Market attention is now firmly fixed on Friday's highly anticipated Bank of Japan policy decision, which is widely expected to deliver a 25-basis-point rate hike to 1.25%, marking the highest level in approximately 31 years. Traders have also begun pricing in an increased probability of another rate increase in December, driven by energy-driven inflation risks, providing meaningful support for the yen.

Expectations are building that the BOJ will raise its policy rate by 25 basis points to 1.25% at the conclusion of its September meeting, a level not seen in roughly three decades. The prospect of additional tightening in December has gained traction as rising energy costs amplify inflation pressures, and this shift in expectations is placing downward pressure on the USD/JPY pair. Analysts suggest that the more hawkish repricing of the BOJ's policy path is the primary reason the yen can still edge higher even amid a robust dollar environment. The combination of an energy supply shock and sustained wage growth is accelerating the central bank's normalization timeline, shortening the previous roughly six-month interval between rate increases. Market participants will scrutinize Governor Kazuo Ueda's post-meeting press conference for clues on whether the pace of tightening could accelerate further, though much of the expected hike appears already reflected in current pricing.

On the dollar side, the greenback reached its highest level since late July following the Federal Reserve's hawkish rate increase on Wednesday. The Fed delivered its first rate hike in over three years, with the latest dot plot indicating room for one more increase before year-end. Oil-driven inflation concerns are further supporting the case for continued Fed tightening, which directly underpins the dollar and the USD/JPY pair. The dollar's strength is clearly limiting the downside for USD/JPY, as the exchange rate struggles to retreat significantly even with the BOJ's expected move. Investors are interpreting the Fed's policy shift as a signal of tightening global liquidity, reinforcing capital flows back into dollar-denominated assets. In the near term, the dollar index's resilience is capping the yen's appreciation potential, with the market awaiting actual interest rate differentials to shift once both central banks' policy decisions are finalized.

Escalating tensions in the Middle East are providing additional support for the safe-haven dollar. Recent developments indicate that Iran-backed Houthi forces have claimed Saudi aircraft conducted over 450 airstrikes in Yemen over the past week, alongside assertions of shooting down a Saudi F-15 fighter jet over Marib province. This situation is sustaining a geopolitical risk premium that favors dollar bulls and limits USD/JPY's downside. The intensifying conflict is heightening concerns over energy supply disruptions, indirectly reinforcing inflation and tightening expectations. Safe-haven flows are channeling into dollar assets, while the yen's traditional appeal as a defensive currency appears relatively diminished. Market watchers are closely monitoring subsequent military developments, as any further escalation could prolong the dollar's strength. Geopolitical factors have emerged as a significant external variable influencing current exchange rate dynamics.

The tug-of-war between yen and dollar positioning around the 156.00 level reflects a balanced set of forces: the yen draws support from more hawkish BOJ expectations, while the dollar benefits from the Fed's hawkish stance, oil-driven inflation, and Middle East safe-haven demand. With both sides relatively evenly matched, the exchange rate has ended its three-day advance but retains limited downside room. Friday's BOJ decision is the key short-term directional catalyst: a more hawkish signal than market expectations could drive the yen further upward, whereas a cautious tone or failure to validate December hike expectations could see USD/JPY regain upward momentum. Until the BOJ announcement, the 156.00 level remains the focal point for bulls and bears alike.

As of 10:52 Beijing time, USD/JPY was trading at 156.21/22.