BoJ Expected to Hold Rates as Energy Prices and Fed Dominate JPY Outlook

ING's analysts, Chris Turner and Padhraic Garvey, expect the Bank of Japan to maintain its policy rate at 1.00% on July 31. They argue that any modestly hawkish shift from the BoJ would be unlikely to significantly boost the Japanese Yen or alter the trajectory of the USD/JPY exchange rate.

The analysts believe that energy prices and the Federal Reserve's reaction function will dominate the USD/JPY market over the coming months, rather than the potential for a more hawkish BoJ. They point out that Wednesday's FOMC meeting will have a significant impact on this dynamic.

According to Turner and Garvey, barring a surprisingly dovish Fed meeting or a sudden drop in Brent oil prices back to $70/bl, they expect the USD/JPY exchange rate to remain bid near 163-164 levels into the BoJ meeting. There is an outside risk of USD/JPY reaching 165 if Governor Ueda's press conference is insufficiently hawkish.

However, the analysts caution that FX intervention remains a possibility, citing the BoJ's recent $70bn spending on yen-selling and its remaining reserves of $1.09 trillion.