JPMorgan: Even faster BoJ tightening unlikely to lift the yen through BoJ efforts alone - FJElite

Following yen-buying intervention efforts since July 30 and Governor Ueda’s somewhat hawkish remarks at the July 31 BoJ policy meeting, expectations for further BoJ tightening have risen sharply. The market is now pricing in a greater-than-70% probability of a September rate hike.

Rate-hike expectations have increased not only at the front end but also further out the curve. However, this has not translated into yen appreciation; instead, the relationship between BoJ hike expectations and JPY has become a negative correlation.

One interpretation is that investors are pricing in a scenario in which political pressure keeps the BoJ's policy stance behind the curve. In that scenario, yen depreciation could accelerate at some point in the future, forcing the BoJ to deliver much larger hikes later to contain the currency. As a result, a weaker- yen outlook and higher BoJ hike expectations are being priced in as a package —producing the observed inverse correlation.

Our Japan economists have revised their forecast to reflect a somewhat faster tightening pace by the BoJ. expecting the policy rate to reach 2.00% by end- 2027. However: (1) a move to 2% is already largely priced in, and (2) the negative correlation between BoJ hike expectations and JPY is likely to persist for the time being. Therefore, we think that a faster BoJ hiking path will only have a limited impact on our medium- to long-term yen-weakness view. We keep our year-end USD/JPY target unchanged at 164.

The BoJ's ability to change the current situation—where rising hike expectations do not generate yen strength appears limited. A clearer message from the government may be required to dispel the market's belief that the government is pressuring the BoJ to keep policy rates as low as possible.