JPY: Bank of Japan’s Tapering Hawkishness

Key points:

BOJ’s Pruning Hawkishness: The BOJ left rates unchanged at 0.25% and signaled a cautious approach to further hikes, likely delaying any action until next year, due to fading inflation risks and a need to monitor wage growth.
Q4 Volatility May Bring Additional Caution: Both local Japan elections and US Presidential elections could add a further sense of caution for Governor Ueda towards more rate hikes especially after the impact on the markets after the BOJ’s July rate hike.
Yen Outlook: The yen outlook remains cautiously bullish, with potential gains expected to be gradual and choppy as both the Fed and BOJ preach gradualism. JPY could still serve as a defensive hedge against rising geopolitical risks.

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The Bank of Japan (BOJ) left its interest rates unchanged at 0.25%, as expected. While the decision itself wasn’t surprising, Governor Ueda’s dovish remarks hinted at caution regarding further rate hikes.

With inflation risks easing and the central bank closely monitoring wage growth sustainability, the BOJ seemed to lack any urgency on another rate hike. Rising volatility from Japan’s local elections and the U.S. presidential election in Q4 further lowers the likelihood of a rate hike in 2024.

Dovish Hints from Governor Ueda

Inflation upside risks are easing due to the impact of fading JPY weakness.
The BOJ is watching the impact of the two rate hikes implemented earlier this year.
There is caution due to the market impact following the July rate hike.

While the BOJ upgraded its view on consumer spending today, domestic growth remains heavily dependent on the global economy’s trajectory—whether it will achieve a smooth soft landing or face a recession. The central bank is also waiting for October services price data and further insight into wage trends before spring wage negotiations next year.

These factors suggest that Governor Ueda is in no rush to raise rates. Inflation expectations remain in focus, but the BOJ is likely to wait for more conclusive data, potentially delaying any rate hike until December or even 2025.

Yen Gains to be More Orderly as Fed and BOJ Preach Gradualism

The yen’s bullish outlook remains intact given that the Fed-BOJ yield gap will stay in a downtrend over the medium-term. However, gains could be tempered by both the Fed and BOJ’s patient approach.

With upcoming local and U.S. elections in Q4 expected to drive volatility, a BOJ rate hike this year is increasingly unlikely. While wage growth and inflation trends keep the possibility of another rate hike alive next year, yen gains are expected to be more gradual and choppy in the near term.

However, the yen could still serve as an effective defensive hedge amid rising geopolitical risks. More pronounced yen strength would likely require a sharper downturn in the U.S. economy, particularly if recession fears intensify.

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