(Bloomberg) — A key risk moment looms for the yen for this week when Bank of Japan Governor Kazuo Ueda speaks after the central bank’s policy meeting on Friday.
While the BOJ is widely expected to leave interest rates unchanged, Ueda’s comments will be scrutinized by yen traders for any misstep which risks triggering a further slide in the Japanese currency. It first fell to the lowest against the dollar since 1986 in June and has continued to weaken this month.
The yen continues to be pressured by rising oil prices, fiscal concerns and wide interest-rate differentials despite a record intervention by the authorities in the last quarter. Although clearer signals from Ueda could help steady the currency, market participants caution that it won’t trigger sharp yen gains.
“If Ueda is not sufficiently hawkish, then the yen will continue to weaken beyond 165 to the dollar,” said Mark Dowding, chief investment officer at RBC Bluebay. “I think that Ueda will open the door to a hike at the September or the October meeting,” but he is unlikely to be hawkish enough to cause the yen to rally sharply.
BOJ officials are open to raising interest rates at a faster pace as the yen’s continued weakness adds to upside inflation risks, according to people familiar with the matter.
Still, half the economists surveyed by Bloomberg expect the BOJ to wait until December to lift its benchmark interest rate, with Prime Minister Sanae Takaichi’s government seen as a potential obstacle to further action. The market is also concerned about Takaichi’s proposal to lower the tax on food.
“For the yen to strengthen materially, the BOJ would likely need to deliver a meaningful hawkish surprise, such as clearer forward guidance on the timing of the next hike or signaling that a larger move remains on the table,” said Samara Hammoud, a strategist at Commonwealth Bank of Australia. “Even with a hawkish outcome, we do not expect dollar-yen to reverse course, as fundamentals including the terms of trade and interest rate differentials remain unfavorable for the yen.”
Overnight index swaps show about a 29% chance of a rate hike by September, and around 78% by October.
What Bloomberg Strategists Say…
The yen does not need another gentle nudge. It needs shock and awe.
The BOJ needs to put a bigger option on the table. Signaling a 50bp hike is possible would show it is serious about catching up, rather than content to remain behind the curve. Officials have talked about a neutral rate near 2%. With the policy rate at 1%, getting there through incremental tightening could take until 2028 — even under a faster schedule.
— Mark Cranfield, Markets Live strategist, Singapore. For the full analysis, click here.
Preceding the BOJ decision will be the Federal Reserve’s policy meeting, where swaps predict a 32% chance of a rate hike.
“If the BOJ press conference is interpreted as dovish, the yen could easily weaken past 165 and that would trigger intervention,” said Taketomo Shimizu, fixed-income chief investment officer at Asset Management One Co.
Japanese Finance Minister Satsuki Katayama’s warning last week about taking bold steps to counter excessive volatility in the currency market has put traders on heightened alert for intervention.
Stefan Rittner, senior portfolio manager at Allianz Global Investors, remains neutral on the yen as “intervention risks are rising as depreciation accelerates, while the risk of it negatively impacting Japan’s terms of trade due to higher energy prices persists.”
“The BOJ typically prefers to retain flexibility, and committing to a specific path now would be inconsistent with that approach,” he added.
–With assistance from Momoka Yokoyama.
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