MUFG: The JPY - FJElite
The yen is largely unchanged after the BoJ’s latest policy meeting with USD/JPY continuing to trade just above the 160.00-level. After initially weakening in response to the US-lran deal announced over the weekend, there has been a lack of follow through for US dollar selling ahead of tomorrow's important FOMC meeting. The muted yen reaction to the BoJ’s latest policy meeting highlights that the BoJ had already clearly signalled that they planned to hike rates today by 0.25 point to 1.00%. At the same time, the BoJ announced that they plan to pause their QE taper programme from FY2027. Until then the BoJ will continue to slow monthly JGB purchases by around JPY200 billion per quarter. From April 2027, the amount of monthly JGB purchases will remain at about JPY2 trillion. Both the decisions to raise rates and pause the QE taper were backed by a majority of 7-1 with Toichiro Asada the sole dissenter.
The updated statement on monetary policy revealed that the BoJ’s decision to raise rates further today was backed by their assessment that Japan’s economy is developing generally in line with their base line scenario. The BoJ judged that there was a reduced risk of a significant slowdown in the economy given that the government has taken measures to reduce the negative hit from higher energy prices, and progress has been made in securing alternative sources of supply for raw materials that are highly dependent on the Middle East.
At the same time, the BoJ noted concern over the risk of underlying CPI inflation deviating upward to a level above the price stability target of 2.0%. the BoJ highlighted that there has been relatively fast pace of price pass-through in business-to-business transactions from higher oil prices, and that the price pass-through could spread to an increase in consumer prices across a wide range of items. The BoJ also highlighted that medium to long-term inflation expectations had continued to rise posing upside risks their inflation target. In light of these developments, the BoJ judged that another rate hike was appropriate, and continued to signal that they “will continue to raise the policy rate and adjust the degree of monetary accommodation".
We expect the BoJ to stick to a gradual pace of monetary tightening and deliver another rate hike later this year. The weak yen is one factor which could encourage the BoJ to speed up the pace of rate hikes but there was no strong indication over the timing of the next hike at today’s policy meeting. The yen’s failure to strengthen on the back of today’s BoJ rate hike will keep pressure on Japan to intervene again to provide support. As we highlighted in yesterday’s FX Daily Snapshot, leveraged funds have been ramping up short yen positions over the past month which will add to concerns that speculative selling is driving the weaker yen. The US-lran deal to reopen the Strait of Hormuz should help to ease fundamental selling pressures for the yen by lowering energy prices and dampening expectations for Fed rate hikes.
