With the USDJPY pair hovering around the crucial level of 150 over the last week or so, there has been rampant speculation about what the BOJ will do. The coming action will be pivotal to determine whether the currency pair resumes its carry-trade infused ride higher or confirms a second peak in November on its decline lower.
While there has been no major data release to change the outlook, the perception of opinions at the BOJ given the unusual circumstances in Japan are taking renewed importance. While Japanese authorities talk about the threat of tariffs on the economy, investors wonder if the BOJ will actually come through with the hikes needed to keep the yen from making another run at the 160 level.
Getting the Inside Scoop
The press has been trying to get ahead of what will happen at the BOJ’s next meetings, contributing to the speculation. A new outlet called “Jiji” reported that the bank “may” refrain from cutting rates this year. The thing is, this is in line with other reporting from financial news sources, suggesting that the BOJ might wait until the March meeting before finally raising rates.
On the other hand, the same financial outlets suggest that the December meeting is “live”. The idea is that the BOJ wants to give itself a “free hand” to make policy moves at any of the meetings, but would prefer to hike at the end of the first quarter of 2025. Following the news, future markets went from a majority (57%) pricing in a rate cut in December to a minority (41%). Traders are apparently believing these rumors.
The Complicating Factor: The US
Prime Minister Shigeru Ishiba this week gave a cryptic message, saying the government should consider a “suitable” exchange rate. He declined to provide any details about what that meant, but was evidently referring to the USDJPY pair, which has garnered the concern of Japanese officials over the last several months. The main problem, of course, is the large interest rate gap between the currencies, which has made them very attractive for carry trading.
There are two ways to close the gap: The BOJ raises rates, and/or the Fed cuts. At the moment, it seems the BOJ is very reluctant to raise out of fear of hurting the slow economy in Japan. The Fed, on the other hand, sees rates as restrictive, and is more likely to ease. So, as far as the BOJ is concerned, it might be a waiting game to see if the Fed does the Japanese bank’s work for it.
The Convenient Timing
Fortunately for the BOJ, it will hold its December policy meeting one day after the Fed does. If the Fed does go through with its rate cut, then the BOJ could be under less pressure to hike. But, if it doesn’t (and markets see around a 25% chance of that), then the BOJ might feel forced to step in to forestall the exchange rate rising again. As a result, the upcoming US data next week could be much more important for the yen than domestic figures.
On the other hand, the BOJ might ultimately have no choice as inflation keeps rising. A couple of years ago, Japanese companies were apologizing for raising the prices on their products. Over the last week, a series of consumer goods companies from rail companies to frozen food firms quietly disclosed intentions of raising prices by double digits in the first quarter of next year. Without a substantial decline in the yen to reduce the input costs of goods, prices might keep rising, and with it, the expectation that the BOJ will do something, regardless of the Fed.
