Yen Unable to Grasp Positives
- Written by: Gary Howes
Above: File image of Bank of Japan Governor Ueda. © European Central Bank, reproduced under CC licensing
The Japanese yen's chronically weak underbelly is exposed.
The Bank of Japan is likely to end the year with another interest rate rise, but the Japanese yen doesn't seem to be able to grasp this supportive development.
"Despite the initial yen bid following hawkish remarks by Bank of Japan Governor Kazuo Ueda, which effectively signalled a December rate hike, the yen now trades back at pre-announced levels," points out Justin McQueen, an analyst at Reuters.
Ueda opened the door to a cut when he said his colleagues would consider the "pros and cons" of raising interest rates at the December 19 meeting.
He said Japan was seeing solid momentum of wage demands for fiscal year 2026, while seeing recent weakness in the exchange rate as risking adverse implications for inflation expectations and thus underlying price pressures.
The yen and bond yields rose after the remarks, reflecting a market that is now approximately 80% priced, up from 60% last week.
"In light of the government’s recent announcement of a substantive fiscal stimulus package, most of which is directed at supporting households hurting due to an elevated cost of living, we thought it might be awkward for the BoJ to hike so soon," says Tom Kenny, Senior International Economist at ANZ.
"However, Ueda appears to have addressed those anxieties by stating that, even if the policy rate was increased, financial conditions will remain accommodative," he adds.
The Bank of Japan is the sole major central bank engaged in a rate hiking cycle, meaning it is closing the interest rate differential with its peers.
That should bolster the yen. However, the inability of the currency to respond is worrying says McQueen.
"For recent yen buyers this is a concerning development, given that if the currency struggles to sustain a bid on good news, then risks are much more clearly on the downside," he explains.
He says the glacial pace at which the BoJ has been raising interest rates means that the hawkish BoJ trade alone is not enough to materially support the currency.
"This is not expected to change anytime soon, even if the central bank hikes in December," he adds.