Rabobank's Senior FX Strategist Jane Foley discusses how prospective Bank of Japan (BoJ) policy shifts on JGB purchases and rate hikes could influence the Japanese Yen (JPY). Foley highlights Nikkei stories on a possible 25 bps hike and a pause in tapering from April 2027, notes domestic and overseas demand for JGBs, and projects USD/JPY reaching 158 in three months, assuming further BoJ tightening.

BoJ tapering pause and rate risks

"The Nikkei newspaper is reporting that the BoJ is set to hike rates by 25 bps at its forthcoming policy meeting. This aligns with the market consensus. Additionally, the newspaper reports that the central bank “is also considering pausing the tapering of its government bond purchasing program, starting in April 2027”."

"More stabilisation in the JGB market is likely to lessen potential volatility in the JPY."

"According to the BoJ, at this point the Bank’s holdings of JGBs will have reduced by around 16-17% as a result of the tapering policy. According to the Nikkei newspaper, the BoJ is considering pausing repurchases at these levels from April 2027. This comes against the backdrop of concerns within the JGB market that the BoJ may be falling behind the curve on inflation and that fiscal stimulus could impact supply."

"By pausing tapering at current levels, the market should have more time to find its equilibrium, which should create some stability, assuming JGB supply is not increased significantly. This should lessen risk of bouts of JPY volatility."

"This means that in order to support the JPY, the BoJ may have to signal a potentially accelerated pace of rate hikes at its June policy meeting. Given the headwinds to growth implied by the Iran war, it is not clear that it will be comfortable in doing so. This could leave the JPY vulnerable. Our forecast of a move to USD/JPY 158 in 3 month assumes further BoJ rate hikes this year."

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