The disconnect MUFG highlights, hike odds near 80% without corresponding yen buying, points to a market that has priced in tightening ahead of any clear signal from the BOJ itself, leaving the currency vulnerable if the central bank either delivers less than expected or pushes back on the pricing. A hawkish surprise would likely be needed just to hold the yen steady, while any attempt by the BOJ to talk down the probability risks reigniting weakness at a moment when USD/JPY is already sitting just below the intervention-sensitive 160 level. Longer-dated JGB yields staying elevated on fiscal policy and Cabinet reshuffle speculation adds another layer of pressure on Japanese assets, while the Nikkei’s inability to extend gains suggests equities are not offering an offsetting source of yen demand either.
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MUFG says the market, not the BOJ, is driving the surge in rate-hike bets, and that gap is exactly why the yen hasn’t rallied despite them.
Summary:
- MUFG says expectations of a BOJ rate hike at the September meeting have risen to around 80%, helped by recent reports and the rise in oil prices, with markets also pricing around a 50% chance of two hikes by year-end
- Despite this, the bank notes those expectations have not translated into yen buying
- July CPI data released on 21 August showed inflation accelerated from the prior month despite downward pressure from rice prices, reinforcing expectations of further increases
- Long and super-long JGB yields remain under upward pressure amid reports on next fiscal year’s expansionary budget and speculation over a Cabinet reshuffle as early as next month, while the Nikkei 225 has struggled to move higher
- The yen has weakened against currencies other than the dollar even as these hike expectations have built, with USD/JPY sitting just below the intervention-sensitive 160 level
- There is no confirmation yet that BOJ Governor Ueda will attend Jackson Hole, though Deputy Governor Himino is due to speak at a meeting with local leaders on 27 August
- MUFG argues the rise in hike expectations looks more like market pressure on the BOJ than a result of the BOJ’s own communication, and warns that if those expectations prove excessive, the risk is skewed toward disappointment and near-term yen weakness
MUFG says expectations of a Bank of Japan rate hike at the September meeting have climbed to around 80%, helped by reports late last week and the recent rise in oil prices, with markets also assigning roughly a 50% probability of two hikes by year-end. Yet according to the bank, that shift in pricing has not translated into yen buying, a disconnect it views as telling in itself.
The bank points to July inflation data, released on 21 August, which showed price growth accelerating from the previous month despite downward pressure from rice prices, reinforcing the case for further increases ahead. At the same time, long and super-long dated Japanese government bond yields remain under upward pressure, driven by a steady stream of reports on next fiscal year’s budget under the government’s expansionary fiscal stance and speculation over a possible Cabinet reshuffle as early as next month. The Nikkei 225 has also struggled to extend gains. Against that backdrop of headwinds facing Japanese assets more broadly, MUFG notes the yen has actually weakened against currencies other than the dollar, even as rate hike expectations have built.
MUFG flags that there has been no confirmation as of writing that BOJ Governor Kazuo Ueda will attend the Jackson Hole symposium, though Deputy Governor Ryozo Himino is scheduled to speak at a meeting with local leaders on 27 August. The bank argues that if the BOJ believed the market’s 80% pricing of a September hike was misplaced, it would presumably move to correct that view. But doing so carries its own risk, since pushing back against the pricing could itself become a fresh catalyst for yen weakness at a time when intervention concerns are already keeping USD/JPY just below the 160 level. MUFG notes that outcome would sit awkwardly alongside the BOJ’s own recent emphasis on the risk that a weaker yen could push consumer inflation higher via costlier imports.
Taken together, MUFG suggests the recent surge in rate hike expectations looks more like the market pushing the BOJ to act than a result of the central bank’s own guidance, a dynamic it says may also explain why those expectations have failed to generate yen buying. With the BOJ set to step up its communication with markets from next week, the bank says the key focus will be on how policymakers shape expectations beyond the September meeting itself. MUFG cautions, however, that expectations which have already risen this far could set the stage for disappointment if the BOJ under-delivers relative to pricing, and it currently sees near-term risk in USD/JPY as skewed toward further yen weakness given how much has already been priced in.
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Next meeting is mid-September:
This article was written by Eamonn Sheridan at investinglive.com.