MUFG’s Lee Hardman notes the Japanese Yen has recovered slightly, pulling USD/JPY back below 156.00 after touching 156.82, but stresses that loose Bank of Japan policy remains a headwind. Political signals from Prime Minister Takaichi and new dovish BoJ board nominations are fuelling concern over the pace of policy normalization, while Oil and Middle East risks threaten to weigh further on the Yen and support the Dollar.

BoJ normalization doubts weigh on yen

"The yen has strengthened modestly overnight resulting in USD/JPY falling back below the 156.00-level after hitting a high yesterday of 156.82."

"Nevertheless, the nomination yesterday of two dovish new BoJ board members by Prime Minister Takaichi’s government who are known to be strong supporters of reflationist policies in Japan have added to unease over the pace of policy normalization going forward."

"Market participants are not expecting a significant change to the outlook for BoJ policy in the near-term, and are still pricing in high probability of the next rate hike being delivered as soon as in April (around 17bps are currently priced in) and a further rate hike is almost fully priced in by year end."

"A weaker yen and /or higher price of oil triggered by military tensions in the Middle East are two immediate upside risks for inflation."

"We remain wary of the risk of a more significant and sustained spike higher in the price of oil which would increase downside risks for currencies from energy importing countries such as Japan and Europe, and undermine our outlook for further US dollar weakness this year."

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