BoJ Policy Announcement: Yen's Fate Hangs in the Balance

JPY: Big swings in sight as BoJ announces policy

The Bank of Japan has started its two-day meeting, with the announcement due early in the morning tomorrow (London time). Bank officials have already tempered rate hike expectations for this month by saying such a move is still premature. Still, with investors now actively betting on the end of negative rates in January, the language at this meeting will be key for the short-term performance of the yen.

Governor Kazuo Ueda (pictured) is facing the options of either keeping the message broadly unchanged and disappointing the market’s hawkish expectations or offering hints about the state of the discussion on a rate hike and potentially suggesting a tentative timing. The good performance of the yen recently as global rates declined is surely taking off some pressure, but data is starting to prove increasingly inconsistent with the ultra-dovish stance of the BoJ.

Our economist is still leaning toward 2Q24 for the first hike, and if that is the preference of the BoJ as well, then it may be too early for a real change in the dovish message later, and the yen risks a downward correction. However, the chances of a hike in January when new economic projections are released are non-negligible and depend on data as well as on JPY performance.

Expect any hawkish surprise in communication tomorrow to push USD/JPY close to the 140 support, whereas an unchanged message can bring the pair back to 145, where we could see selling interest if the dollar momentum proves soft.