J.P. Morgan On JPY

The US Bank weighs in the JPY, seeing risks of further weakness post today's policy outcome:

J.P. Morgan: "Our economists think the BoJ likely will consider it too early for an additional rate hike, but it is also under pressure to restrain expectations of a weaker yen. Thus, the focus should be on whether the bank will open the door to reduce its balance sheet by modifying the wording on the amount of JGB purchases that is currently stated as “broadly the same amount as before (about JPY6 trillion per month)”, as well as Governor Ueda’s communication toward additional rate hikes at the press conference. As for FX, after the USD/JPY marked a multi-decade high, the BoJ governor Ueda said on April 19 that “JPY weakness would affect underlying inflation and if the effect is indispensably large, the BoJ would act appropriately”. Given that, the market’s attention on the upcoming BoJ MPM has increased.

Recent USD/JPY rally has been driven by broad USD strength accompanied by receding expectation for the Fed cuts and higher UST yields. However, significantly low Japanese real interest rates, as a result of the BoJ policy, should have contributed to JPY weakness to a certain extent. Given that, if the BoJ does not take any measures to the yen weakness at tomorrow’s MPM, it is likely that USD/JPY will rally further (as discussed later, there has been a clear tendency that USD/JPY rallies on the BoJ MPM day). Although we expect the BoJ will change the words about JGB purchases in the statement and pave the way to reduce the purchases, it would not be enough to contain the downward pressure on the yen.

USD/JPY rallied on the day of MPM for the 8th consecutive meeting since April 2023. Notably, the USD/JPY rallied more than 1% in five out of eight cases. Figure 1 suggests “buy the rumor, sell the fact” type price action in USD/JPY around BoJ MPM. And it is also likely that pending demand to sell the JPY materialized with receding uncertainties about policy once the BoJ MPM is over. We believe the JPY has tended to weaken after the BoJ MPM because the BoJ MPM failed to boost market expectations for the future BoJ rate hikes in most cases."