The prospect of a BoJ rate hike in December continues to grow with the OIS implied probability now creeping above the 50% level. The data released today in Tokyo did nothing to alter the gradual increasing probability with Tokyo CPI data revealing a core annual rate of 2.8%, slightly higher than the market consensus, MUFG's FX analyst Derek Halpenny reports.

Yen gains supported despite limited FX reaction

"The weakness of the Japanese Yen (JPY) is helping lift inflation expectations with Japan’s 10-year breakeven rate trading just below 1.7%, matching the high from March this year, the highest in the series going back to 2004. The BoJ will also have more confidence on the outlook for the economy. Industrial output jumped by 1.4% MoM in October following a 2.6% gain in September. The market was expecting a decline of 0.6% in October. It was the largest two-month gain since July 2022."

"Further stimulus is now on the way as well and today the government announced its plans for JGB issuance to cover the extra spending. The net extra spend in the JPY 21.3trn supplementary budget amounts to JPY 18.3trn and JPY 11.7trn of this will be covered by issuance of additional debt. In a step that will help support the long-end of the curve the issuance will focus on front-end tenors with t-bills, 2-year and 5-year JGBs taking the added issuance. There had been an expectation that the 10-year sector would also see added issuance."

"Upward pressure on front-end yields is also more supportive for the yen than an issuance plan that encouraged curve steepening. The issuance plan along with the data released today and the rising probability of a BoJ rate hike in December should prove more supportive for the yen although there has been limited FX reaction today to the data and issuance announcement. FX volumes are bring impacted following the halting of trading on CME after a data canter issue. Today is also month-end and FX performance can often be determined by those less predictable flows."