MUFG’s Senior Currency Analyst Lee Hardman reports the Japanese Yen is holding up better against the Dollar as the BoJ leaves the door open to an April rate hike and officials step up FX warnings. While higher Oil prices and Yen weakness are seen lifting inflation expectations, Hardman notes the BoJ’s cautious stance is unlikely to reverse the broader Yen downtrend alone.

BoJ caution and intervention risk aid Yen

"The yen has held up better against the US dollar overnight supported by the BoJ’s latest policy update and further verbal intervention from Japanese policymakers. It has helped to prevent USD/JPY from rising above the 160.00-level after hitting a high of 159.87. Finance Minister Katayama reiterated that they are “prepared to do utmost to respond to FX moves any time”, and that they “have a high sense of urgency against FX moves”."

"The comments indicate a high risk of Japan intervening if USD/JPY rises back above the 160.00-level and moves closer to the high from July 2024 at 161.95."

"The updated guidance leaves the door open for another hike as soon as the next policy meeting in April although there was not a clear signal it will be delivered. Instead, Governor Ueda signalled that they will decide policy meeting by meeting. The BoJ’s next policy meeting is not until 28th April and a lot could happen before then in the current environment, so it makes sense that the BoJ did not strongly commit an April hike today."

"Governor Ueda also highlighted that the BoJ is closely watching yen weakness. He stated that the weaker yen may boost inflation expectations alongside higher energy prices. He emphasized that the BoJ need to watch the impact of FX on prices, and reiterated that FX may have more impact on prices compared with earlier periods."

"While today’s BoJ policy update leaned more on the hawkish side, it is unlikely to be sufficient on its own to reverse the yen’s weakening trend."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)