Japanese yen outperformed on Friday, with the USD/JPY pair rising to 146.06, up 0.14% on the day. The yen has seen notable strength this week, rising 1% against the weaker US dollar.
Japan’s core consumer price index rose 2.7% in July, up from 2.6% in June, in line with market expectations. Higher electricity prices, following the removal of subsidies, contributed to the rise, which was the third straight increase and the highest reading since February.
Japan faces an unusual situation among major economies, as inflation is rising while the Bank of Japan is planning to raise interest rates. Although interest rates have risen to positive territory, they are still close to zero. Bank of Japan Governor Kazuo Ueda reiterated in a speech to parliament on Friday that the bank intends to continue its steps towards normalizing monetary policy.
Ueda indicated that the bank would raise interest rates if the economy and prices continue to match expectations. but he warned that the BOJ is monitoring the impact of turmoil in financial markets on inflation. The Bank of Japan is expected to hold rates at its September meeting. but a hike could be seen in December.
The annual Jackson Hole meeting is an important opportunity for central bankers to discuss interest rate policy and provide signals to markets. Although the Fed is likely to keep rates unchanged next month, Jerome Powell’s speech today may not provide any new insights. Markets will be closely watching Powell’s tone and any comments on inflation and the labor market, amid growing concerns about the employment situation that could push the Fed to continue easing policy before the end of the year.
Markets are still in a state of uncertainty about the Bank of Japan’s expected moves through the end of the year.
EUR/JPY rises, recovering daily losses amid mixed economic outlook
The EUR/JPY pair saw a significant rise after falling to a daily low of 161.800, only to recover all of its losses and move to around 162.50 during the US session on Friday. This recovery came after the pair fell earlier in the day, which was driven by comments from Bank of Japan Governor Kazuo Ueda, whose hawkish stance strengthened the Japanese yen. Ueda indicated that more interest rate hikes could be expected this year, given the ongoing price pressures and instability in Japan.
On the other hand, speculation regarding further interest rate cuts by the European Central Bank is capturing the attention of markets in the eurozone. Experts expect the ECB to resume its policy easing cycle in September, with another rate cut likely in the fourth quarter of this year. These expectations suggest that the ECB may deliver further cuts, weighing on the euro and contributing to the uncertain economic outlook in the region, as wage pressures are slowing.
In parallel, the Japanese OIS market estimates a 34% chance of a 25bp rate hike by the end of the year. According to Kong, he expects the Bank of Japan to deliver another rate hike in October 2024, followed by two more hikes in April and July 2025. Ueda was very firm in stressing that the steps taken at the July policy meeting were justified, and explained that the interest rate could gradually move towards the neutral rate if the BOJ’s expectations continue to materialize. Markets remain under the influence of these divergent expectations from central banks, creating an environment of volatility in the movement of the EUR/JPY pair and reflecting the ongoing economic challenges in Japan and the Eurozone.
Japanese Yen Gains on BoJ Governor’s Comments
The Japanese yen appears to be on the verge of a significant rally, supported by the hawkish central bank governor. According to market analysis, the USD/JPY pair temporarily fell 0.7% to below 145.50, but recovered some of its losses during the US session on Friday to reach 146.01. The Bank of Japan Governor Kazuo Ueda confirmed that interest rate hikes will continue if economic data develops as expected.
In the latest assessment by the BOJ Governor, the Japanese economy is the only one among the G10 economies likely to see an interest rate hike in the coming months, while the rest are expected to see a rate cut. This policy divergence could strengthen the yen and recoup some of the losses it has suffered in recent years.
The USD/JPY pair is leading the market action this morning, as Ueda’s comments in the Japanese parliament helped boost the yen. Derek Halpenny, analyst at MUFG Bank Ltd, also noted that the sharp decline in USD/JPY during July and August reflects a change in market participants’ behaviour, with the trend of selling the pair on rallies increasing.
Today, USD/JPY could see higher levels given Jerome Powell’s dovish tone. However, the pair’s future trajectory could be bearish. In our view, it seems unlikely that the yen will come under increasing pressure from carry trades again, limiting the likelihood of a Fed rate cut.
According to Kong of Commonwealth Bank, the Bank of Japan governor was expected to be more dovish, given the criticism levelled at the bank for its aggressive rate hike in July, which is thought to have contributed to market turmoil.
