A few points made by MUFG in a note, in summary.
1. BoJ Rate Hikes in September and December May Be Justified on Wages
The Bank of Japan (BoJ) may find justification for interest rate hikes in both September and December if wage growth continues to show resilience, according to analysts at MUFG. With inflationary pressures persisting and Japan’s labour market tightening, rising wages could support the case for monetary policy normalization.
Japan has long struggled with stagnant wage growth, but recent data suggests a shift as companies respond to labour shortages by increasing salaries. If this trend continues, the BoJ could take a more aggressive stance in adjusting its ultra-loose monetary policy. MUFG notes that while inflation has moderated, sustained wage growth could provide the necessary conditions for further rate hikes later this year.
2. See USD/JPY Falling to 140.0 on Rate Path Pricing
MUFG analysts predict that USD/JPY could decline to 140.0 if markets fully price in Japan’s rate hike trajectory. Currently, the yen remains under pressure due to the wide interest rate differential between Japan and the United States, where the Federal Reserve maintains relatively high rates. However, if the BoJ signals a stronger commitment to tightening monetary policy, market participants may shift their expectations, leading to a stronger yen.
Additionally, expectations of Fed rate cuts later in the year could contribute to a weaker U.S. dollar, adding further downward pressure on the USD/JPY pair. MUFG warns, however, that for a significant yen rally to materialize, BoJ rate hikes must be perceived as credible and backed by strong economic fundamentals.
3. Expect Dollar-Yen to Trade Between 148 and 155 in the Short-Term
Despite the possibility of long-term yen appreciation, MUFG sees the USD/JPY pair fluctuating between 148 and 155 in the near term. This range reflects the ongoing uncertainty over global interest rate policies, as well as Japan’s gradual approach to exiting its ultra-loose monetary stance.
For now, the yen remains vulnerable to external factors such as shifts in U.S. economic data, Federal Reserve policy expectations, and broader risk sentiment. While intervention by Japanese authorities remains a possibility if the yen depreciates too rapidly, MUFG believes market forces will largely dictate the currency’s movements within this range in the coming months.
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USD/JPY up
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