BoJ’s hawkish hold underpins Japanese Yen

• With the Yen ahead of most major currencies, USD/JPY edges lower.
• A more confident BoJ inflation assessment and its hawkish decision to hold rates underpin the Japanese Yen.
• Further Fed rate hike expectations and a US Dollar rebound contain losses in USD/JPY.

USD/JPY is trading around 157.43 at the time of writing. The pair remains under pressure ahead of the weekend, with the Japanese Yen (JPY) outperforming most major currencies after the Bank of Japan’s (BoJ) hawkish decision to leave rates unchanged. A recovery in the US Dollar (USD) has nevertheless helped the pair regain some lost ground from its intraday low of 156.96. It is still set to close the month largely unchanged.

An 8-1 vote at Friday’s October meeting left the BoJ policy rate at 1.25%, in line with broad expectations. The sole dissenter, board member Hajime Takata, backed a 25-basis-point (bps) rise to 1.50%. He argued that conditions warrant a quicker adjustment towards the neutral interest rate.

Further interest rate increases remain the central bank’s intention as economic, price and financial conditions change. Their timing and pace will hinge on whether economic activity and prices follow its baseline projections, alongside the risks to that outlook.

2027 Inflation Forecast Upgrade Keeps BoJ Rate Hikes in Focus

Brown Brothers Harriman strategists highlight a significant change in the Bank of Japan’s latest message: “for the first time since adopting the 2% target in 2013, the BoJ declared underlying CPI inflation ‘generally consistent’ with its goal.” They argue that this development “strengthens the case for additional rate hikes to ensure inflation remains anchored there.”

The strategists contrast the BoJ’s “minor growth revisions” with the fact that it “raised its inflation forecasts for 2027”. Inflation risks remain “skewed to the upside,” they note, whereas risks to the economic outlook are “generally balanced.” BBH nevertheless observes that “there was no material shift to BoJ rate expectations,” despite the firmer inflation assessment. The swaps curve continues to reflect “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.”

A rebound towards 102.00 from 101.59 in the US Dollar Index (DXY), which measures the Greenback against six major currencies, marks a recovery from earlier pressure on Friday. A sell-off in technology shares had lifted demand for government bonds and pulled Treasury yields down. Following disappointing earnings reports, investors continue to question the returns on substantial AI expenditure.

Further monetary tightening expectations also underpin the US Dollar. According to the CME FedWatch Tool, traders assign around a 72% probability to a December rate increase. The latest Personal Consumption Expenditures (PCE) figures put US inflation above the Fed’s 2% target. Meanwhile, third-quarter Gross Domestic Product (GDP) growth exceeded expectations, giving the central bank greater scope to increase rates.

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