Philip Wee at DBS Group Research argues that USD/JPY looks overextended as it tests Japan’s 160 pain threshold. The pair is supported by the US-Japan rate differential, but markets now price a roughly two-thirds chance of a Bank of Japan (BoJ) rate hike on April 28. Policymakers increasingly see prolonged Japanese Yen weakness as a cost-push inflation threat to households.

Yen weakness collides with BoJ hawkish turn

“USD/JPY appears overextended as it tests Japan’s policymakers’ 160 pain threshold.”

“The market is caught between the positive US-Japan interest rate differential supporting USD/JPY and increased expectations (67% chance) for a Bank of Japan rate hike at its April 28 meeting.”

“In Tokyo, the policy consensus is getting clearer that protracted JPY weakness, once viewed as a boon for exporters and the Nikkei 225, is now a primary cost-push inflation threat eroding household purchasing power.”

“The BoJ’s Tankan Survey also reinforced this hawkish shift, highlighting inflation expectations while indicating sufficient corporate sentiment to absorb a 25-bps hike without tipping the economy into recession.”

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