The Bank of Japan’s (BoJ) 25bp rate hike to a 30-year high of 0.75% failed to support the yen, as cautious guidance from Governor Ueda undercut confidence. Despite rising domestic yields and narrowing US–Japan spreads, the JPY weakened sharply, likely exacerbated by positioning, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

JPY slides despite narrowing yield spreads

"The BoJ tightened its policy rate 25bps to a 30Y high of 0.75%, as expected. But cautious comments on the rate outlook from BoJ Governor Ueda at his press conference have undercut the JPY. Market pricing for a follow-up move late next year has not changed and domestic yields are rising, however. The 10Y bond rate has pushed above 2% for the first time since 1999 and US/Japan spreads have narrowed to 215bps, the smallest gap since 2022."

"Yet the JPY has dropped sharply. Market positioning may account for the JPY underperformance on the day but the decoupling from spreads is becoming more egregious and US officials and Japanese policymakers will take note. Expect more urgent warnings from Japanese monetary officials about the JPY in the coming days."

"A solid rise in the USD on the week and a clear break out from the recent consolidation (bull flag pattern) targets more USD gains and a resumption of the broader bull trend in the USD. A test of 158 appears imminent and additional gains towards 160+ are now very likely from a technical point of view. Support is 156.25/50."