RPT-MNI POLICY: Weaker Yen Ups Dec Hike Chances But US Vote A Risk

(Repeats to clarify that yield differential with Fed is narrowing)

The yen’s depreciation to about 150 to the dollar increases the chance the Bank of Japan will next raise rates in December, but officials are wary of potential financial market volatility in the wake of U.S. elections and changing bets on Fed easing, MNI understands.

The BOJ expects the yen to trend towards strengthening as the yield differential with the Fed narrows, but optimism over a soft landing in the U.S. has helped send the currency into retreat from its year strong-point near 140 reached in mid-September. A return to yen strength, particularly beyond the 140 level, would pressure exporters’ profits and reduce chances that companies will continue to increase wages at the 3% level which the BOJ considers to be compatible with further rate hikes into next year.

While the BOJ understands from its branch managers and contacts with business that leading companies stand ready to raise wages, their final decisions will depend on profits for the second half of this fiscal year. Smaller companies would tend to follow the lead of larger firms. (See MNI POLICY: BOJ Wants FY25 Base-Pay Hikes Above 3%)

A stronger yen would also reduce upside risks to prices, even though the economy and prices are moving in line with the BOJ’s projections so far. Bank officials largely agree that current economic and financial conditions do not call for a rate hike at the October meeting. (See MNI POLICY: BOJ Rate View Intact, Despite Dovish PM Remarks)

The average exchange rate predicted by Japanese companies this fiscal year is JPY145.15, and JPY144.31for the second half, according to the September Tankan survey.