BOJ: Market BoJ Pricing Outlook & USD/JPY Gains Diverging
The weaker yen trend remains a key focus point for Japan policy makers. Earlier the FinMin stated that FX intervention was an option, a clear step up in rhetoric around yen weakness. BoJ Governor Ueda was also before parliament and warned that the weak yen could raise import costs and domestic prices, ultimately putting upward pressure on consumer prices. The chart below plots the 3 month rate of change in spot USD/JPY and the 3 month change in the 3 month OIS rate (1yr forward) as a proxy for the markets monetary policy outlook. The relationship has diverged somewhat recently, with little change in the 3mth rate of change in the policy proxy despite the break higher in USD/JPY. All else equal if USD/JPY continues to track higher risks, are likely to build around markets pricing in higher rates.
- There are a number of caveats of course. The new Takaichi regime is leaning against tighter BoJ expectations. The FinMin stated earlier that Japan is still halfway to achieving its sustainable, stable price goal (accompanied by wage gains). Katayama added that she understands the BOJ agrees with this assessment.
- Still, near term push back on BoJ rate hikes may drive the market to feel the central bank is at risk of falling further behind the curve. It may then price in more catch up later on.
- The other factor is that the market may not feel that policy rates are likely to go much beyond 1%. The 3mth rate 1yr forward OIS is currently 0.98% and this year we have spent little time above 1%.
- Such assessments could change though once we get a clearer picture of the new stimulus package the government is expected to announce soon. From late yesterday via BBG: Japanese Prime Minister Sanae Takaichi is set to unveil an economic package funded by an extra budget about 27% bigger than what was pledged in her predecessor’s spending plan a year ago, underscoring her commitment to an expansive fiscal policy.
Fig 1: Japan BoJ OIS Market Pricing Outlook & USD/JPY - 3 month Changes
Source: Bloomberg Finance L.P./MNI
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