Rabobank's Senior FX Strategist Jane Foley highlights that the Bank of Japan (BoJ) is reportedly set to hike rates by 25 basis points at its forthcoming policy meeting, in line with market consensus, according to the Nikkei newspaper [1]. Additionally, the BoJ is considering pausing the tapering of its government bond (JGB) purchasing program starting in April 2027, at which point the Bank’s holdings of JGBs will have been reduced by approximately 16-17% as a result of the tapering policy [1].
Foley notes that a pause in tapering at these levels could allow the JGB market more time to find equilibrium, potentially reducing volatility in the Japanese Yen (JPY), provided that JGB supply does not increase significantly [1]. However, there are concerns within the JGB market that the BoJ may be lagging behind the curve on inflation and that fiscal stimulus could impact bond supply [1].
To support the JPY, the BoJ may need to signal a potentially accelerated pace of rate hikes at its June policy meeting, but headwinds to growth, such as those implied by the Iran war, could make the central bank hesitant to do so, leaving the JPY vulnerable [1]. Rabobank projects that USD/JPY could reach 158 in three months, assuming further BoJ rate hikes this year [1].
No immediate market reaction or analyst opinions beyond Rabobank's projections are discussed in the article [1].
CONCLUSION
The Bank of Japan is reportedly considering a 25 bps rate hike and a pause in JGB tapering from April 2027, which could stabilize the JPY if supply remains steady. However, uncertainty around inflation and fiscal stimulus, as well as external growth risks, may leave the yen vulnerable. Rabobank forecasts USD/JPY at 158 in three months, contingent on further BoJ tightening.