Japanese Yen stays firm following hawkish BoJ hold

• With the Yen ahead of most major currencies, USD/JPY edges lower.
• A firmer inflation assessment and the BoJ’s hawkish decision to leave rates unchanged underpin the Japanese Yen.
• Further Fed rate rises remain expected, while a US Dollar recovery also curbs losses in USD/JPY.

At around 157.43 at the time of writing, USD/JPY has recovered from an intraday low of 156.96 but remains under pressure ahead of the weekend. The Japanese Yen (JPY) is ahead of most major currencies after the Bank of Japan (BoJ) left rates unchanged with a hawkish message. A rebound in the US Dollar (USD) has nevertheless helped the pair recover part of its earlier decline, leaving it on course for a broadly unchanged month.

An 8-1 vote at Friday’s October meeting left the BoJ’s policy rate at 1.25%, in line with widespread expectations. Dissenting board member Hajime Takata preferred a 25-basis-point (bps) rise to 1.50%, arguing that conditions warranted a quicker move towards the neutral interest rate.

Further interest rate increases will continue as economic, price and financial conditions evolve, the central bank said. How soon and how quickly it raises rates again will hinge on whether the economy and prices follow its baseline projections, alongside the risks to that outlook.

BoJ’s higher inflation outlook sustains Yen rate hike expectations

The latest message from the Bank of Japan marks a significant development, according to strategists at Brown Brothers Harriman. They observe that “for the first time since adopting the 2% target in 2013, the BoJ declared underlying CPI inflation ‘generally consistent’ with its goal.” They believe this change “strengthens the case for additional rate hikes to ensure inflation remains anchored there.”

Although growth projections saw only “minor growth revisions,” the strategists note that the BoJ “raised its inflation forecasts for 2027”. Inflation risks remain “skewed to the upside,” whereas risks to the economic outlook are “generally balanced.” BBH nevertheless highlights that, despite greater confidence on inflation, “there was no material shift to BoJ rate expectations,” as the swaps curve continues to imply “80% odds of a 25bps BoJ rate hike to 1.50% at the December 18 meeting and nearly 75bps of tightening in the next twelve months.”

Meanwhile, the US Dollar Index (DXY), which measures the Greenback against six major currencies, is recovering towards 102.00 from 101.59. Earlier on Friday, a sell-off in technology shares increased demand for government bonds, lowering Treasury yields and weighing on the US currency. Disappointing earnings reports have left investors concerned about the returns on substantial AI spending.

US inflation remains above the Fed’s 2% target, the latest Personal Consumption Expenditures (PCE) figures showed, while stronger-than-expected third-quarter Gross Domestic Product (GDP) growth leaves the central bank greater scope to lift rates. Expectations of further monetary tightening are supporting the US Dollar, with traders assigning roughly a 72% probability to a December rate increase, according to the CME FedWatch Tool.

Speaking on Friday, St. Louis Fed President Alberto Musalem lent further support to that view. He said monetary policy remained accommodative and the US central bank would increase interest rates again soon, adding that “gradual rate adjustments” were preferable to abrupt changes.