The Japanese Yen has continued to underperform, with USD/JPY trading just below the 160.00 level, despite a generally weaker US Dollar elsewhere in the market [1]. According to MUFG’s Senior Currency Analyst Lee Hardman, this underperformance is primarily due to the market scaling back expectations for an April Bank of Japan (BoJ) rate hike following cautious remarks from BoJ Governor Ueda [1].
The Japanese rate market is now pricing in approximately 7 basis points of hikes for this month’s BoJ policy meeting, a notable decrease from around 14 basis points at the end of last week [1]. The main catalyst for this dovish repricing was Governor Ueda’s recent speech, in which he refrained from signaling an imminent rate hike and expressed concerns about uncertainties stemming from developments in the Middle East and their potential impact on Japan’s economic activity, prices, and financial conditions [1]. Ueda also highlighted that there are two-sided risks for inflation [1].
While Ueda’s comments do not explicitly rule out a rate hike as early as this month, the probability has increased that the BoJ will delay tightening until June or July to further assess the economic fallout from the Middle East conflict [1]. This delay leaves the Yen vulnerable to further near-term weakness, which could in turn reinforce upside risks to inflation, particularly from higher energy prices [1].
CONCLUSION
The market has responded to BoJ Governor Ueda’s cautious stance by reducing expectations for an imminent rate hike, resulting in further weakness for the Japanese Yen. The delay in policy tightening leaves the Yen exposed to additional downside risk, with potential implications for inflation if energy prices rise.