The Japanese Yen (JPY) gained against most major currencies as markets anticipate the Bank of Japan’s first rate hike since January, with PMI data showing modest growth and investors looking for clues on the central bank’s policy normalization path, BBH FX analysts report.

Market eyes BOJ neutral rate guidance

"JPY is up against most major currencies. Japan PMI slips in December, but the growth outlook remains encouraging. The composite PMI dipped to 51.5 from a three-month high of 52.0 in November with services growth easing while the manufacturing sector contraction eased."

"The Bank of Japan (BOJ) is widely expected to raise the policy rate 25bps to 0.75% (Friday). It will be the first rate hike since January. Comments about the neutral rate could offer clues about the extent of the normalization cycle. The BOJ currently estimates the neutral rate to be within a wide range between 1% and 2.5%."

"Earlier this month, BOJ Governor Kazuo Ueda said the bank is trying to see if it can narrow down the range and it will make it public if it succeeds in doing so. A tighter neutral rate range would clarify the BOJ’s policy path and bode well for JPY. The swaps curve implies a policy rate of 1.50% over the next two years. We see room for USD/JPY to adjust lower towards the level implied by US-Japan two-year bond yield spreads around 140.00."