MUFG’s Senior Currency Analyst Lee Hardman highlights continued Japanese Yen underperformance, with USD/JPY trading just below 160.00 even as the US Dollar (USD) weakens elsewhere. Markets have scaled back expectations for an April Bank of Japan (BoJ) rate hike after Governor Ueda’s cautious remarks, increasing the likelihood of tightening being delayed to June or July and leaving the Yen vulnerable to further near‑term weakness.

BoJ repricing weighs on Japanese Yen

"The yen has continued to underperform at the start of this week resulting in USD/JPY rising back to within touching distance of the 160.00-level."

"One reason why the yen has continued to underperform at the start of this week has been the scaling back of BoJ rate hike expectations."

"The Japanese rate market is currently pricing in around 7bps of hikes for this month’s BoJ policy meeting compared to around 14bps of hikes at the end of last week."

"The main trigger for the dovish repricing was yesterday’s speech from BoJ Ueda who refrained from providing a clear signal that they are preparing to hike rates imminently. He also expressed more concern that “developments in the Middle East remain uncertain and we will closely monitor them and their potential impact on economic activity, prices and financial conditions”. He added that there were two-sided risks for inflation."

"While the comments do not explicitly rule out another hike as early as this month, we acknowledge that there a higher probability now that the BoJ will wait a little longer to assess the economic fallout from the Middle East conflict before tightening policy further."

"One downside of delaying the timing of the next hike is that it leaves the yen vulnerable to further weakness in the near-term which could reinforce upside risks to inflation from higher energy prices."

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