The USDJPY is bouncing back after going on a bit of a roller-coaster in the wake of the FOMC decision on Wednesday. The Fed initially sounded more hawkish with two dissenting votes to the hold, but later Chair Kevin Warsh’s press conference suggested a more “wait-and-see” approach. Markets took that as more dovish, weakening the dollar and allowing the yen to recover.
Yet, now as the market looks ahead to Friday’s BOJ rate decision, the yen is showing weakness and the USDJPY is rising. Markets are pricing in an almost 100% chance that the BOJ will keep rates unchanged, but also an almost 80% chance of a hike in December. Sentiment going into the meeting is pretty hawkish, and given how strong Governor Kazuo Ueda’s rhetoric on inflation has been recently, it’s hard to see how there could be a surprise to the upside. There are some ways in which the BOJ could appear less hawkish, and that might weaken the yen a little.
Short-Term Gains vs Long-Term Trends
The yen is in a bit of a complicated situation that could affect how the market reacts to the BOJ decision. The recent sell-off in AI and technology stocks have left investors looking for safe havens, which traditionally include the yen. But, the moves have caused wild swings in the Nikkei, reducing the demand for yen-denominated assets.
A more hawkish central bank in Japan would likely continue to pressure the tech sector, contributing to the dollar’s relative strength. On the other hand, inflation has risen above target despite multiple government measures to control prices. Reportedly, the government is looking to end its energy subsidies early next year, which would contribute to rising inflation in the medium to long term.
Markets Are Looking at the Timing
It takes time for central bank policy to have an effect, anywhere from six months to a year and a half, depending on the circumstances. So, if the BOJ hikes now, the effect on inflation won’t be felt until well into 2027. Meanwhile, the yen is likely to react to more immediate situations, such as higher energy prices, the deflation of the tech stock bubble, and expectations for the rate gap.
Both the BOJ and the Fed are fighting energy-induced inflationary pressures. However, the Fed has rates much higher than its Japanese counterpart. If the war in the Middle East is resolved, or there is a major correction in the markets, then the Fed could cut rates much faster and to a larger degree than the BOJ. Those possibilities become more likely on a longer time line, compared to a shorter time frame.
What Could Move the Markets
To put the situation differently, the BOJ is likely to decide based on long-term risks while the market reacts to the short-term situation. Both the BOJ and the Fed are anticipated to hike at their respective December meetings. This means the rate gap is likely to remain unchanged in the short term.
What markets will pay attention to, then, is the relative odds of the December hike. If they shift compared to the start of the week, then that could move the USDJPY. Up if the gap widens, down if the gap shrinks.
