Japanese Yen slips as markets focus on Fed and BoJ monetary policy meetings

• Broad Japanese Yen weakness gives USD/JPY an upward bias.
• Unchanged interest rates remain the consensus expectation for this week's Fed and BoJ meetings.
• December tightening expectations put policymakers' guidance at the centre of market attention.

USD/JPY is trading near 157.42 at the time of writing. The pair has an upward bias on Monday, supported by a stronger US Dollar (USD) and a Japanese Yen (JPY) that is lagging its major peers. On Friday, it slipped to 156.08, its lowest point since 18 September.

Following last week's decline, the US Dollar is regaining some stability. Concerns about AI-related investments had fuelled demand for government bonds, weighing on US Treasury yields. Tracking the Greenback against a basket of six major currencies, the US Dollar Index (DXY) is near 101.91. Last week, it fell to 101.45, its lowest reading since 1 October.

Monday's Treasury market shows a mixed yield picture. Shorter-dated yields are edging up, but longer-dated yields are largely unchanged near recent lows. The benchmark 10-year US Treasury yield is around 4.98%.

Fed and BoJ rate decisions take centre stage

Wednesday brings the Federal Reserve (Fed) interest rate decision, with the Bank of Japan (BoJ) following on Friday. The consensus is for both to leave rates unchanged. In September, the Fed increased rates by 25 basis points (bps), while the BoJ delivered a cumulative 50 bps of tightening earlier this year as the Middle East energy shock intensified inflationary pressures.

December nevertheless remains the expected timing for further rate rises from both central banks. With this week's pauses largely anticipated, traders will scrutinise the policy statements and comments from Fed Chair Kevin Warsh and BoJ Governor Kazuo Ueda for signals on the timing and pace of additional tightening.

The latest US and Japanese inflation readings reinforce expectations for more tightening. September's US headline CPI rose to 3.7% YoY from 3.4%. Producer Price Index (PPI) inflation reached 6.3% YoY, compared with 5.6% in August. In Japan, inflation excluding fresh food climbed from 1.7% to 2.1%, exceeding the BoJ's 2% target. Excluding both fresh food and energy, inflation increased from 1.9% to 2.4%.

December in focus as BoJ pauses; firmer inflation supports Yen

A pause to evaluate the previous increase is the likely outcome, according to Brown Brothers Harriman strategists, who say the BoJ is “widely expected to keep rates on hold at 1.25% and assess September’s 25bps hike before tightening again.” They point back to September, when BoJ Governor Kazuo Ueda “warned that rapid rate hikes could unsettle asset prices,” and cautioned that “it could take some time to confirm that 2% inflation is entrenched.”

BBH nonetheless sees room for a hawkish shift, arguing that “firmer underlying inflation leaves scope for a more hawkish Outlook Report, lifting BoJ rate expectations in favor of JPY.” The strategists cite market pricing as evidence of that shift: “the swaps curve price in 75% 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.”