Japanese Yen: Recovery needs faster BoJ normalisation – OCBC

OCBC’s Sim Moh Siong and Christopher Wong note that September Bank of Japan (BoJ) hike expectations have risen sharply, but the Japanese Yen (JPY) has reacted only modestly. They argue a sustained JPY recovery likely needs clearer commitment to faster policy normalisation, with intervention risks capping USD/JPY near 160. They also highlight alignment between BoJ and government on addressing inflation and supporting JPY-buying intervention.

BoJ hikes, intervention and JPY recovery

"Bloomberg reported that the Takaichi administration supports an early BoJ rate hike, helping lift market-implied odds of a September hike to 75%, from 60% a week ago."

"This points to growing alignment between the BoJ, which remains concerned about inflationary pressures from a weak JPY, and the government, which is seeking to enhance the effectiveness of JPY-buying intervention."

"Despite the shift in expectations, the JPY's response has been muted. Should the BoJ deliver another rate hike in September, it would mark its third increase in nine months and the fastest pace of policy tightening since the collapse of Japan's asset bubble in 1989."

"However, it remains unclear how much appetite the government has for additional rate hikes beyond September or October."

"A more meaningful and sustained JPY recovery will likely require a stronger signal from the BoJ that policy normalisation can proceed at a faster pace. For now, intervention risks should help cap USD/JPY near 160, while the CHF remains the preferred funding currency for carry trades."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)