Japanese Yen: Second order effects guide BoJ risks – Rabobank

Rabobank’s Senior FX Strategist Jane Foley discusses USD/JPY around the upcoming Bank of Japan (BoJ) meeting, highlighting parallels between Federal Reserve (Fed) Chair Warsh’s comments and Governor Ueda’s challenge. Foley stresses Japan’s shift from deflation, the need to manage second order price effects, and warns of possible profit-taking in Japanese Yen (JPY), while still forecasting USD/JPY at 154.00 over three months.

BoJ tightening, inflation dynamics, Yen risks

"During the press conference, Warsh noted that hiking rates cannot address the supply shocks that caused US inflation, but that policy-makers have a duty to prevent second order effects. On this point the BoJ and Fed have had different starting points."

"Not only is the market largely priced for a BoJ rate hike tomorrow, but there is an expectation that Ueda will have to follow up with a hawkish message on the pace of rate hikes going forward in order for the JPY to maintain its recent improved tone. Assuming the BoJ does hike rates this week, just three months after the last announcement, this will mark the most tightly spaced policy tightening for years."

"If Ueda cannot telegraph news regarding an accelerated pace of policy tightening tomorrow, the market may be disappointed. This factor, combined with this week’s better tone of the USD suggests room for a ‘sell the fact’ reaction in the JPY vs. the greenback into the weekend."

"That said, even if he says nothing explicit about the pace of policy tightening, in our view Ueda has sufficient supportive economic data to signal a hawkish tone, which should contain any market disappointment and prevent the currency pair from heading back to the 160.00 area."

"Whether the BoJ can also satisfy similar market demands depends on how confident it is that the psychology of both Japanese firms and consumers has changed sufficiently to ensure that the holy grail of moderate price pressures can be sustained. While profit-taking on fresh long JPY positions cannot be ruled out following the BoJ meeting tomorrow, we are optimistic that the economic reforms in Japan can help sustain USD/JPY around current levels in the coming months. Our 3-month USD/JPY forecast is 154.00."