The USD/JPY pair edged higher during Asian trading hours on Friday, currently trading above the 160.25 level.
While a rate hike by the Bank of Japan next week is almost certain, the fact that USD/JPY remains firmly above the 160 mark suggests continued market caution regarding the yen's outlook.
The Bank of Japan is widely expected to raise its policy rate from 0.75% to 1% next week, which would be its highest level since 1995—a span of 31 years. The central bank may also signal its readiness to continue pushing borrowing costs higher.
Even with Governor Kazuo Ueda absent from the meeting due to medical treatment, the central bank is expected to remain focused on addressing inflation risks stemming from the conflict in the Middle East. This move would align the BOJ with other central banks, such as the European Central Bank, that are pivoting towards tighter monetary policy.
Governor's Absence Unlikely to Affect Decision, Hike Aims to Counter Inflation
Governor Kazuo Ueda is receiving a two-week hospital treatment for a liver cyst infection and will miss the two-day meeting concluding on June 16. Among the remaining eight board members, a majority have previously warned of rising price pressures.
Analyst Justin Low from Investinglive noted that he does not believe Ueda's absence will have any impact on the BOJ's interest rate decision, with the market widely anticipating a 25-basis-point hike to 1%.
This would be the first rate increase since last December and symbolizes a shift in the BOJ's policy focus—from cautiously unwinding the massive stimulus left by the previous governor to concentrating on the traditional central bank role of curbing inflation.
Focus on Deputy Governor Uchida's Remarks for Potential Hawkish Signals
With the market having fully priced in a rate hike next week, attention is now turning to the timing and pace of future increases.
A key dilemma for investors is how to interpret the potential gap between Governor Ueda's previous dovish-leaning tone and the upcoming post-meeting remarks by Deputy Governor Shinichi Uchida. Deputy Governor Uchida will chair the briefing in the governor's place, and the market will scrutinize his wording for clues on whether rising inflation might force the central bank to accelerate its tightening cycle.
Due to energy shocks, rising import costs from a weak yen, and a tight labor market exacerbating inflation risks, the BOJ may reiterate its commitment to further rate hikes.
Bank of America pointed out that since the market has already priced in a June hike, the real "hawkish" or "dovish" signal will lie in the future guidance. If the BOJ's communication pushes market pricing for an October hike above a 60% probability, it would be perceived as a hawkish shift.
If Deputy Governor Uchida's press conference remarks lean towards such a path, it could reverse previous dovish expectations and provide support for the yen.
Rates Approaching Neutral Zone Floor, Slow Pace of Hikes Weighs on Yen
A hike to 1% would bring the BOJ's policy rate close to the lower bound of its estimated neutral range of 1.1%-2.5%—a level considered neither stimulative nor restrictive for the economy. Upon reaching this level, the central bank would need to proceed with greater caution in subsequent decisions, as further rate increases could potentially dampen economic activity, especially against a backdrop of already weak domestic demand.
According to BOJ insiders, the central bank currently sees no urgent need to accelerate or implement consecutive hikes, primarily because the economic impact of the Middle East conflict remains uncertain. Policymakers desire more time to observe the trajectories of inflation and growth.
However, the BOJ's slow pace of tightening is also cited as a key reason for the yen's persistent weakness. Since its first hike last December, the BOJ has cumulatively raised rates by only 25 basis points. In contrast, the Federal Reserve and the European Central Bank maintain policy rates above 5% and 2%, respectively, leaving the interest rate differential between the US and Japan near historically wide levels.
This significant yield gap makes the yen a preferred funding currency for carry trades—where investors borrow low-yielding yen to invest in higher-yielding assets—exerting persistent selling pressure that has pushed USD/JPY towards the 160 level.
The yen is currently hovering around 160 per dollar, a level widely perceived as approaching the Japanese Ministry of Finance's tolerance limit. While there has been no large-scale official intervention since late April, the 160 level is seen as a potential trigger point. Further yen depreciation could force Japanese authorities to step into the market to curb the expansion of imported inflationary pressures.
Monitoring Pace of Bond Purchase Reduction, Current Tempo May Be Maintained
At next week's meeting, the BOJ will also review its bond purchase reduction plan, which currently runs until March next year, and formulate a new plan for the fiscal year 2027 and beyond. This is a key part of the central bank's exit from its massive easing program.
Since initiating balance sheet reduction last year, the BOJ has gradually scaled back its purchases of long-term government bonds, but the pace of reduction has been cautious.
With the Middle East conflict fueling inflation expectations and causing ongoing volatility in the bond market, the BOJ is reportedly considering proposals to maintain its current bond-buying pace and may extend this tempo beyond the next fiscal year to stabilize market sentiment.
This implies that, despite rising interest rates, the central bank might slow or even pause the balance sheet reduction process to avoid excessive pressure on financial institutions' balance sheets from a potential surge in yields.
As companies continue to pass on higher energy costs from the conflict to consumers, Japan's wholesale prices rose 6.3% year-on-year in May, marking the fastest pace in three years. Persistent increases in the producer price index typically feed through to consumer prices in the coming months.
Analysts suggest this price pressure could push core consumer inflation significantly above 2% later this year, potentially putting greater pressure on the central bank to hike rates.
A key factor to watch will be whether wage growth can keep pace with rising prices, which will be crucial in determining whether inflation becomes entrenched.
Conclusion: Hike a Done Deal, Balancing Hawkish and Dovish Signals is Key
In summary, a BOJ rate hike to 1% next week is a market consensus. The focus lies on signals regarding the future policy path. Although Deputy Governor Shinichi Uchida is viewed as a dovish member, against the backdrop of persistent yen weakness and rising inflation pressure, his press conference remarks could lean hawkish to prevent further yen depreciation.
Concurrently, the central bank is likely to maintain its current pace in reducing bond purchases to stabilize the volatile bond market. While the slow pace of rate hikes is a factor behind the yen's weakness, the BOJ appears more concerned about the economic impact of moving too quickly.
The market will scour Deputy Governor Uchida's comments for clues on the future pace of tightening, with any hawkish-leaning signals potentially triggering a short-term rebound in the yen.
From a technical perspective, the USD/JPY daily chart shows the pair remains in an overall uptrend, with the current price near 160.25, approaching the previous high of 160.59. Support levels to watch are around 158.96 and the prior low of 155.03, while resistance sits at the 160.59 level. A decisive break above the previous high would open the door for further gains, while a rejection and pullback would warrant caution for a potential correction towards the 20-day moving average around 156.03. As of 10:56 Beijing Time, USD/JPY was quoted at 160.28/29.
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