USD/JPY climbs as markets price in a 25bps Bank of Japan (BOJ) hike on December 19, supported by fiscal stimulus and upside risks to Japanese wage growth, though fair value suggests a longer-term move toward 140, BBH FX analysts report.

USD/JPY could slide toward fair value near 140

"USD/JPY is up today to 155.57, with the next resistance offered at 156.12 (50% retracement of November-December downswing). Japan’s October cash earnings data was mixed and does not move the dial on Bank of Japan (BOJ) rate expectations. Labor cash earnings printed at 2.6% y/y (consensus: 2.2%) vs. 2.1% in September. The less volatile scheduled pay growth for full-time workers was 2.2% y/y (consensus: 2.4%) vs. 2.3% in September."

"Japan wage growth is not a source of significant inflation pressures given annual total factor productivity growth of about 0.7%. However, risk to wages growth is skewed to the upside. One of Japan’s largest labor union groups (UA Zensen) plans to push for a 6% bump in overall wages for regular employees next year after agreeing on a 4.75% gain in 2025."

"The swaps curve price in 90% odds of a 25bps BOJ rate hike to 0.75% on December 19. Tighter monetary policy paired with Japan’s government latest fiscal stimulus package is JPY positive. We see room for USD/JPY to adjust lower towards the level implied by US-Japan two-year bond yield spreads around 140.00."