USD/JPY remains supported above the 155 level as markets await the Bank of Japan’s policy update. Despite recent US rate cuts and soft payrolls data, the yen has failed to rebound, leaving its near-term direction dependent on the BoJ’s guidance and outlook for further gradual tightening, MUFG's FX analyst Lee Hardman reports.

BoJ guidance key as market prices in 25bps hike

"USD/JPY has held up well over the past week, and has even moved further above support at around the 155.00-level overnight. The recent Fed rate cut, soft nonfarm payrolls report and building market expectations for the BoJ to raise rates tomorrow have failed to trigger a bigger rebound for the yen, even as US AI/tech stocks have come under renewed selling pressure over the past week."

"The unfavorable price action highlights the risk that the yen weakening trend, that has been in place since Takaichi won the LDP leadership election, could resume heading into year-end if the BoJ’s hawkish policy update disappoints expectations. A 25bps rate hike is already fully priced so the market reaction is more likely to be driven by the updated guidance delivered by Governor Ueda."

"We expect the BoJ to stick to guidance that further gradual rate hikes remain likely consistent with our forecast for another hike to be delivered by the middle of next year. However, plans for further gradual tightening may not be sufficient to reverse yen weakness while fiscal concerns remain elevated in Japan. If the yen continues to weaken it will increase pressure on Japan to intervene."