ING: The JPY - FJElite

The Bank of Japan looks likely to hike rates by 25bp on Friday. Markets are fully discounting the move, and we see little risk of a surprise hold. If anything, there is a small outside chance of a larger 50bp increase, although we suspect that would be met with some discontent from the growth-oriented government.

We see downside risks for the yen this week, though. A hawkish Fed hike on Wednesday could encourage a rebuilding of speculative USD/JPY long positions, while the BoJ may fall short of validating market expectations, with a December hike already fully priced in. Some JPY bulls may also be looking for an announcement on a domestic shift in GPIF portfolio allocation as early as this week and could be disappointed if none materialises.

Short-term valuation metrics need to be interpreted cautiously for USD/JPY, but they still point to around 2.5% undervaluation in the pair. Against that backdrop, a move back to 156-157 this week appears to be a reasonable near-term target.