MUFG’s FX team highlights that Bank of Japan (BoJ) rate-hike expectations for April have collapsed, even as Japanese inflation data surprise to the upside. They warn that a dovish BoJ versus a more hawkish Federal Reserve (Fed) could push USD/JPY through 160, increasing intervention risk, while authorities try to curb speculative Yen (JPY) selling and signal a likely June rate hike.

BoJ hawkish hold versus weak Yen

"Ahead of the FOMC meeting, the BoJ will meet tomorrow with expectations of a rate hike having come down notably. At the beginning of April about 18bps of tightening was priced but that is now close to zero. The BoJ have drip-fed information to the market suggesting caution was warranted at the April meeting due to the conflict in the Middle East."

"But Governor Ueda will have to thread a fine line between emphasising the current uncertainty as reason for caution and signalling that the BoJ will act to limit upside inflation risks. The monetary stance remains loose and rising inflation will only reinforce the still deeply negative policy rate in real terms. Nationwide CPI data on Friday for March revealed upside surprises for the headline and core rates."

"The BoJ therefore needs to limit this risk and convey a more hawkish message on the outlook for policy. The BoJ tomorrow will also publish updated forecasts, and it is likely we will see inflation projections above the 2.0% target given in January the FY26 projection was 1.9% for core nationwide CPI and 2.0% in FY27. We expect the BoJ to provide a message that signals a likelihood of a hike at the next meeting and we currently assume a 25bp hike to 1.00% in June."

"The threat of intervention was once again communicated last week by FM Katayama and this messaging and the fact that the Fed checked rates in USD/JPY in January have helped limit appetite for yen selling above the 160-level."

"The BoJ’s communication tomorrow will be key for avoiding a bigger move higher in USD/JPY."

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