BoJ Hawkish Tone Fails to Move USD/JPY Out of Range

The Japanese Yen's exchange rate against the US Dollar (USD/JPY) has been stuck between resistance at 160.00 and support at the 200-day moving average, according to Brown Brothers Harriman (BBH).

Bank of Japan (BoJ) Deputy Governor Ryozo Himino recently maintained a hawkish tone, stating that raising interest rates in a timely manner will help avoid inflation spikes and abrupt rate hikes. He added that the bank should pay greater attention to the upside risk to prices than in the past.

Underlying inflation in Japan has firmed up but remains around the BoJ's 2% target or just below. As a result, BBH expects the BoJ to deliver a 25bps rate hike to 1.25% at its next meeting on September 18 (80% priced-in).

However, BBH argues that a lower USD/JPY will likely be driven by a dovish Federal Reserve (Fed) repricing rather than additional BoJ tightening. The bank doubts the BoJ can tighten more aggressively than implied over the next twelve months (75bps), given contained underlying inflation pressures and flat private consumption activity in Q2.