MUFG’s Lee Hardman notes the Japanese Yen is little changed after the BoJ’s widely anticipated 0.25% rate hike to 1.00%, with USD/JPY still trading just above 160.00. The BoJ also decided to pause its QE taper from FY2027, while continuing gradual JGB purchase reductions until then. MUFG expects further gradual tightening this year, but highlights persistent Yen weakness and potential for renewed intervention.

BoJ hike and QE plans support weak Yen

“The yen is largely unchanged after the BoJ’s latest policy meeting with USD/JPY continuing to trade just above the 160.00-level. After initially weakening in response to the US-Iran deal announced over the weekend, there has been a lack of follow through for US dollar selling ahead of tomorrow’s important FOMC meeting. The muted yen reaction to the BoJ’s latest policy meeting highlights that the BoJ had already clearly signalled that they planned to hike rates today by 0.25 point to 1.00%.”

“At the same time, the BoJ announced that they plan to pause their QE taper programme from FY2027. Until then the BoJ will continue to slow monthly JGB purchases by around JPY200 billion per quarter. From April 2027, the amount of monthly JGB purchases will remain at about JPY2 trillion.”

“At the same time, the BoJ noted concern over the risk of underlying CPI inflation deviating upward to a level above the price stability target of 2.0%. the BoJ highlighted that there has been relatively fast pace of price pass-through in business-to-business transactions from higher oil prices, and that the price pass-through could spread to an increase in consumer prices across a wide range of items.”

“In light of these developments, the BoJ judged that another rate hike was appropriate, and continued to signal that they “will continue to raise the policy rate and adjust the degree of monetary accommodation”.”

“We expect the BoJ to stick to a gradual pace of monetary tightening and deliver another rate hike later this year. The weak yen is one factor which could encourage the BoJ to speed up the pace of rate hikes but there was no strong indication over the timing of the next hike at today’s policy meeting. The yen’s failure to strengthen on the back of today’s BoJ rate hike will keep pressure on Japan to intervene again to provide support.”

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