Japanese Yen stays resilient following BoJ’s hawkish hold

• USD/JPY edges lower, with the Yen gaining against most major currencies.
• The Japanese Yen draws support from the BoJ’s hawkish pause and stronger assessment of inflation.
• Losses in USD/JPY remain contained as the US Dollar rebounds and markets anticipate further Fed rate hikes.

USD/JPY remains under pressure ahead of the weekend, with the Japanese Yen (JPY) outperforming most major currencies after the Bank of Japan (BoJ) left rates unchanged while retaining a hawkish stance. A recovery in the US Dollar (USD) has, however, helped the pair claw back part of its earlier losses. Trading near 157.43 at the time of writing, USD/JPY is above its intraday low of 156.96 and is still set to close the month broadly unchanged.

Friday’s October meeting saw the BoJ leave its policy rate at 1.25%, as widely anticipated, with an 8-1 vote. Dissenting board member Hajime Takata called for a 25-basis-point (bps) rise to 1.50%, arguing that conditions warranted a quicker move towards the neutral interest rate.

Further interest rate increases will continue as economic, price and financial conditions evolve, the central bank said. How quickly and when it raises rates will hinge on whether economic activity and prices follow its baseline projections, alongside the risks to that outlook.

Does the BoJ’s firmer inflation outlook keep Yen rate hike expectations alive?

The significance of the Bank of Japan’s latest message is highlighted by strategists at Brown Brothers Harriman, who observe that “for the first time since adopting the 2% target in 2013, the BoJ declared underlying CPI inflation ‘generally consistent’ with its goal.” They believe this change “strengthens the case for additional rate hikes to ensure inflation remains anchored there.”

Although the BoJ introduced only “minor growth revisions,” the strategists note that it “raised its inflation forecasts for 2027” and still considers inflation risks “skewed to the upside,” while describing risks to the economic outlook as “generally balanced.” BBH nevertheless notes that the firmer conviction on inflation meant “there was no material shift to BoJ rate expectations,” as the swaps curve continued to imply “80% odds of a 25bps BoJ rate hike to 1.50% at the December 18 meeting and nearly 75bps of tightening in the next twelve months.”

The US Dollar, meanwhile, is recovering from pressure earlier on Friday, when a sell-off in technology shares lifted demand for government bonds and drove Treasury yields down. Disappointing earnings reports have left investors concerned about the returns on substantial AI expenditure. After touching 101.59, the US Dollar Index (DXY), which measures the Greenback against six major currencies, is rebounding towards 102.00.

The prospect of further monetary tightening is lending support to the US Dollar, with traders assigning around a 72% probability to a December rate hike, according to the CME FedWatch Tool. While the latest Personal Consumption Expenditures (PCE) figures indicated that US inflation remains above the Fed’s 2% target, third-quarter Gross Domestic Product (GDP) growth exceeded expectations, giving the central bank greater scope to increase rates.

That view received further backing on Friday from St. Louis Fed President Alberto Musalem. He said the US central bank would increase interest rates again soon, noting that policy was still accommodative. Rather than abrupt changes, he favoured “gradual rate adjustments”.