FX Views
JPY: BoJ shifting toward a hike, Tankan the next focus
The US dollar has gained versus all G10 currencies this week following the economic data releases that has thrown some doubt over the prospects of the Fed continuing to cut the fed funds rate at the final two FOMC meetings of the year in October and December. As we have highlighted this week, short US dollar positioning is at a level last seen in early 2021 and the US Economic Surprise Index has surged this week reflecting which combined indicates how offside positioning could be if the data from the US was to continue showing surprising strength and resilience. It elevates the importance even more of the labour market data due next week. The more favourable backdrop for the dollar does also raise the probability of the yen weakening further, to levels above 150.00, which will likely intensify focus on the monetary stance of the BoJ. We believe the BoJ is being too cautious and especially now after the recent stronger than expected data, there is less and less justification for waiting to assess the impact of trade tariffs given in addition we have US equities close to record highs. Next week will be important for Japan data as well. The BoJ place a lot of importance on the quarterly Tankan report and the details of that report (released on 1st Oct) will be important in determining whether the BoJ hikes at its meeting on 30th October.
Our Tokyo research team (led by Teppei Ino) analysed the details of the minutes from the BoJ meeting in July and the conclusion is that the details were significant in signalling the potential for a rate hike at the next meeting. The key concluding paragraphs on “the future conduct of monetary policy” (pages 20-21 in the minutes) outlined different views from different policy board members. The minutes run through the thoughts of different members and we can conclude that two of the more hawkish references related to Naoki Tamura and Hajime Takata, who went on to dissent at the policy meeting last week in favour of an immediate 25bp hike. But comments from other members also point to the potential for them to be leaning in favour of a hike as well. For example, one member suggested monitoring data for two to three months and that if evidence suggested the US was better able to withstand the tariff impact then the BoJ should consider exiting the current wait-and-see stance. Surely this member must now see the justification for hiking. Another member warned of being overly cautious and of the risk of missing the opportunity to hike given the positive reaction in equity markets to the Japan-US trade deal.
If there are even four member or certainly five members who have expressed positive sentiment toward the possibility of a rate hike and given one member mentioned two-to-three months of monitoring, the October meeting looks very plausible to us for a possible rate hike. Governor Ueda will of course be key and as we have stated before, the September meeting was not live given the political backdrop at that meeting but By the time of the meeting on 30th October the political backdrop should be a lot clearer with the LDP leadership election over and a new PM in position. If US economic data holds up, equity markets remain in or around record highs and President Trump has not escalated trade tensions, then the international environment will be consistent with a rate hike being agreed. If Governor Ueda signals his intention the minutes suggest it would be relatively easy to garner the majority required.