JPY: Four reasons, no hike – Commerzbank

A few hours before the US Fed, the Bank of Japan will hold its monetary policy meeting tomorrow morning. Expectations have risen recently and the market is pricing a 10bp hike with a higher probability than no hike – even though the majority of economists surveyed by Bloomberg do not expect a hike, Commerzbank’s FX analyst Volkmar Baur notes.

No hike on the horizon

“I am of the latter camp, but I would like to briefly explain my reasons. First, inflation has not moved as the BoJ had expected in recent months. The annual rate has fallen further recently, and there are still few signs of domestic inflationary pressure. Second, the economy has also been rather disappointing of late. According to Bloomberg, economic surprises have been negative for months.”

“This means that the Japanese economy is falling short of expectations. Third, the (temporarily) successful interventions have caused the JPY to appreciate over the past two weeks. Therefore, the exchange rate is less of a reason for a hike. And fourth, the BoJ is expected to unveil its plan to reduce its gross bond purchases. So monetary policy will be tightened anyway.”

“The market may be caught off-guard on Wednesday morning, but if the BoJ does not sound too dovish and continues to keep rate hikes on the table, the JPY's setback should be manageable.”