Japanese Yen: Yen vulnerable after BoJ communication – MUFG
MUFG’s Derek Halpenny notes that the Bank of Japan’s 25bp hike to 1.25% fell short of hawkish market pricing, triggering an initial Yen sell-off as expectations for larger moves proved overdone. BoJ language on real rates shifted from “negative” to “low”, while guidance still points to accommodative conditions and further gradual tightening. MUFG sees scope for USD/JPY to grind higher short term if Dollar sentiment stays favourable.
BoJ hike underwhelms hawkish pricing
"We mentioned here yesterday that we felt the bar was low for the BoJ failing to meet the level of hawkish pricing in the rates market and that is what has unfolded today with the initial reaction to the decision to hike by 25bps to 1.25% underlining the risks that the BoJ could well fail to meet expectations of nearly 100bps (incl today’s hike) of tightening over the coming twelve months."
"Secondly, the BoJ removed the description in the statement that real interest rates were “negative, mainly in the short-to-medium term zone” to “remained at low levels, mainly in the short-to-medium term zone”. This is really just the BoJ acknowledging facts – the move up in front-end rates has been notable (2yr JGB yield is 35bps higher since the last BoJ meeting) and with inflation currently below the 2.0% target the description of “low” rather than “negative” makes sense."
"That was underlined by the fact that the BoJ maintained its view that “accommodative financial conditions are expected to be maintained” and therefore the bank “will continue to raise the policy interest rate and adjust the degree of monetary accommodation”."
"Perhaps most importantly he has stated that the “stage for policy conduct has changed” which would suggest the possibility for an altered pace of tightening ahead although Ueda did then add that the BoJ has no particular pace in mind."
"Hence, some giveback from recent yen strength makes sense to us over the short-term. If broader US dollar sentiment remains favourable, USD/JPY has scope to grind further higher from here over the short-term."
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