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JPY can find a degree of support from expectations for another interest rate hike.
Stronger-than-expected inflation and persistent wage growth are reinforcing expectations that the Bank of Japan (BoJ) could hike interest rates later this year, MUFG analysts said on Thursday, as the yen found modest support against a broadly weaker U.S. dollar.
Japan’s core nationwide consumer price index (CPI) accelerated to 3.5% year-on-year in April, up from 3.2% in the previous month, while the more targeted “core-core” CPI edged up to 3.0% from 2.9%, according to data cited by MUFG.
“Energy prices jumped 9.3% year-on-year and food prices continued to climb – rice prices alone surged 98%,” noted Derek Halpenny, Head of Research for Global Markets EMEA at MUFG. “This keeps alive the prospect of a rate hike by the BoJ later this year.”
Adding to the inflationary pressure, Japan’s wage growth remains elevated. The influential Japan Business Federation (Keidanren) reported an average wage increase of 5.38%, nearly matching last year’s figure of 5.58% and well above historical averages.
“Wage growth at these levels hasn’t been seen since the early 1990s,” Halpenny said. “That’s a key signal for domestic demand strength, supporting the case for policy normalization.”
The yen traded stronger on the day, but MUFG attributed much of the move to broader dollar weakness ahead of a long weekend in both the U.S. and the UK. Nevertheless, the Japanese currency remains under close watch, especially as expectations grow for the Federal Reserve to deliver more rate cuts than the 50 basis points currently priced in by year-end.
“While the OIS curve only prices in 17bps of BoJ hikes this year, that modest expectation still makes Japan an outlier in G10 – and could keep USD/JPY under downward pressure,” Halpenny said.
BoJ officials, including Governor Kazuo Ueda and policy board member Asahi Noguchi, have recently signaled a hands-off approach to rising long-term Japanese Government Bond (JGB) yields. MUFG expects the central bank to maintain its focus on short-term interest rate policy rather than intervene to control longer yields, distancing itself from the yield curve control (YCC) era.
“We see this as a deliberate strategy to preserve the BoJ’s credibility in its normalization process,” Halpenny concluded.
AloJapan.com