MUFG analysts Derek Halpenny and Lee Hardman observe that Japan has seen the smallest hawkish repricing among G10, with markets already pricing two Bank of Japan (BoJ) hikes but little additional tightening after the energy shock. A weaker Japanese Yen reflects expectations that Japan’s energy-import dependence leaves it vulnerable, and the absence of a firm BoJ signal could see USD/JPY trade back above 160.00.

Limited BoJ repricing keeps Yen fragile

"At the opposite end of the spectrum, Japan has seen the smallest adjustment, with yields increasing by only around 6 basis points indicating that market participants expect the BoJ to remain cautious over delivering further rate hikes while Japan’s economy will be hit harder by the negative energy price shock."

"Rate hike expectations have risen the least in Japan in response to the energy price shock. The Japanese rates market was already pricing in another BoJ hike as soon as April, followed by a second increase later in the year, and these expectations have not changed significantly in recent weeks."

"The combination of higher energy prices and a weaker JPY has supported expectations for additional BoJ tightening. The JPY has weakened to reflect expectations that Japan’s economy is likely to be hit harder by the energy price shock given it is heavily reliant on imported energy."

"In the absence of a firm signal pointing to a near‑term hike, it would encourage further JPY selling, lifting USD/JPY back above 160.00. By allowing USD/JPY to rise above 160.00, it would also indicate that Japan’s near-term tolerance for a weaker JPY has also increased in response to the energy price shock."

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