BOJ to Hold Amid Rising Global Yields

The expectation is for the BOJ to keep rates unchanged despite inflation as it stays on the sidelines amid a contest for a new PM and emerges from the effects of US tariffs.

The Key Developments

• BOJ is expected to hold rates once again as the ruling LDP party holds internal elections for a new Prime Minister.
• Focus on comments from Governor Ueda regarding the chances of a rate hike in the near future and any clues he may provide about the runoff of its ETF holdings.
• The recent debt auction saw long-term yields in Japan decline and step away from the global rise in yields on long-dated debt.

BOJ on Hold, But Could Drop Hints for Next Hike

There is a solid consensus among economists that at its Friday meeting, after keeping its monetary policy cycle paused since January. The main reason cited is continued uncertainty as the bank evaluates the impact of tariffs and the ongoing internal LDP election for its leader, who will replace Shigeru Ishiba as Prime Minister. Right before the decision is announced, the latest Japan CPI will be released. The annual headline inflation rate is expected to decline to 2.8% from 3.1%. Meanwhile, the more closely watched core rate is expected to drop to 2.7% from 3.1%. Both readings are well above the 2.0% target, but economists suggest that other concerns will weigh more on the BOJ's decision. So, the data's release may not affect the rate decision or the yen.

Markets will likely focus on Governor Kazuo Ueda's post-rate decision press conference to see if he drops any clues about when the BOJ could resume rate hikes. Ueda has talked tough on battling inflation, but the bank has hesitated to raise rates amid concerns that the export-driven economy could be affected by tariffs. But now that Japan has a firm trade agreement, there are signs that the Japanese economy won't be pushed into recession, which would prevent further rate hikes. An upbeat outlook on the local economy could lead markets to believe that rates might rise sooner. The consensus among economists now is for a 25 bps hike in December. Another matter that could capture investor attention is if Ueda of the bank's ¥37 trillion in ETFs. The BOJ has wound down its stock holdings but has yet to provide details on how it will divest its ETFs amid the Nikkei hitting new record highs.

Rising Yields as the BOJ Prepares to Hike

The recent auction of long-term debt might have provided some unexpected relief for Japanese policymakers, as it. Rising debt levels around the world have been a concern for markets, with Japan being a developed nation with the highest debt-to-GDP ratio. However, the drop in yields and the strong bid-to-cover ratio suggest that investors still view the yen as a safe haven and that a new prime minister with expansionary fiscal policies might not significantly upset the market. It also suggests that the markets might have a more positive reaction if the BOJ provides hints that it is close to raising rates again.

USDJPY Gathers Downward Momentum

After the Fed cut rates on Wednesday, the immediate reaction to the narrowing of the interest rate gap showed USDJPY falling to the July low of 145.50. Although it suggested the downward movement could still have room to run, both the lower Bollinger Band low at 146.40 and the auto trendline held firm amid Powell’s hawkish presser. If the 147.50 resistance firms up, it could still weigh on the pairs and expose support at 145.00 and beyond. A break might even open the door to 142.50 and the 140.000 handle. On the flip side, breaking above the 148.00 trendline and upper Bollinger band of 148.57 would likely see the pair face resistance at the prior swing of 149.00 before heading to the summer high past 150.00 at 150.80.

Source: SpreadEx | USDJPY, Daily