USD/JPY edged down to 156.60 after reaching a multi-month high around 157.90 yesterday. Japan’s sticky inflation backdrop, increased fiscal support, and firm economic activity argue for the Bank of Japan (BOJ) to raise rates in December. However, the BOJ is in a hurry to resume normalizing rates which remains a drag on JPY, BBH FX analysts report.

BOJ cautious despite inflation above 3%

"BOJ Governor Kazuo Ueda still wants to see the “initial momentum” of annual wage negotiations (which typically takes place between February and March) before adjusting policy. The swaps market implies less than 20% odds of a rate hike at the next December 19 meeting, with a full 25bps rate increase priced for March."

"Japan October inflation matched consensus across the board. Headline, core ex. fresh food, and core ex. fresh food & energy CPI all ticked up 0.1pts to annual rates of 3.0%, 3.0%, and 3.1%, respectively. Japan core inflation remains well above the BOJ’s 2% target and tracking above its October projection. The BOJ projects core ex. fresh food and core ex. fresh food & energy CPI to average 2.7% and 2.8% in 2025, respectively."

"Japan’s Prime Minister Sanae Takaichi unveiled a fresh package of economic measures aimed at price relief worth ¥17.7 trillion (2.8% of GDP). That is more than last year's ¥13.9 trillion (2.2% of GDP) supplementary budget and implies additional JGB issuance are in the pipeline. Japan private sector growth momentum gained traction in November. The composite PMI rose to a three-month high at 52.0 vs. 51.5 in October driven by a slower contraction in manufacturing activity. The service sector recorded a solid rate of growth (53.1) that was unchanged from October."