The yen has been consolidating over the last few days, aided in part by verbal intervention from Japanese authorities. However, analysts attribute the bulk of the gains to a near certainty that the BOJ will raise rates on Friday. The latest press reports from Japanese sources, on the other hand, suggest that a rate hike is not a done deal.
The persistent weakness in the yen through the latter part of last year has put considerable pressure on the BOJ to tighten more. But the bank has been quite hesitant to add another 25 bps to the interest rate, which would push it to the highest it has been in 18 years. The retracement in the USDJPY in the last couple of days might offer a little bit of a reprieve.
The Trump Factor
Analysts point to the reaction of the currencies following Donald Trump’s inauguration as President. There was considerable consternation about the possibility of tariffs being implemented from day one. Tariffs targeting Asian countries that maintain trade deficits with the US were a particular concern for yen traders.
But, with no concrete announcement of tariffs, the dollar weakened. On the other hand, the possibility of tariffs is still definitely on the table. This poses a bit of a quandary for BOJ officials. Just last week, Deputy Governor Ryozo Himino highlighted the problem. He said that of course the central bank considers a wide range of economic factors when weighing its decision. But the threat of impediments of trade for a country like Japan that is highly export driven, is naturally a factor for monetary policy. Particularly in a situation where carry trades are buffering the currency.
Wait One More Month?
There were considerable expectations that the BOJ would hike the last time it met in December. When that didn’t happen, the market moved to expecting the move with even more certainty now in January. But, press reports suggest that the BOJ is debating whether or not to wait another month before pulling the trigger on rates, given the uncertainty about whether the tariffs will be implemented or not. That contrasts with a majority of economists who say it’s time to start hiking, and the market pricing in a 90% chance of a hike.
One of the factors to consider is that if the BOJ does go through with the hike, it uses up its “powder”. That is, the market is pretty certain that after this hike, the BOJ won’t go through with more easing for a long time. Which could give more room for currency speculators to push the USDJPY higher, particularly if it turns out the Fed isn’t going to ease any time soon. That will preserve the interest rate gap that makes carry trading appealing, and weakens the yen against the dollar.
Is It Really Needed?
The BOJ might opt to hold off on a rate hike in order to preserve the ability to hike if it’s necessary in the advent of some kind of turmoil around tariffs. Or, if inflation remains hot in the US, and the Fed is forced to hike as well.
On the other hand, Japan is expected to report inflation numbers just hours before the end of the rate decision meeting. CPI for December is expected to accelerate to 3.2% from 2.9%, moving further away from the 2.0% target. Even the “core-core” rate is seen accelerating at 2.6% from 2.4% prior. With that kind of inflation, the BOJ might have no choice but to go through with the hike.
