BOJ Hike Risks Disappointing Markets as Fed Tightening Looms
The yen's recent rally faces a critical moment as investors await the Bank of Japan's (BOJ) policy decision on Friday. The BOJ has been under pressure to shift its cautious rate-hiking path, but analysts warn that it risks disappointing markets if it fails to do so.
Since the start of the month, the yen has surged by 5% against the dollar, with some speculating that Japan's $2 trillion government pension fund might lead a repatriation of capital to invest in domestic assets. However, analysts say the market is pricing in too much and that the BOJ's expected rate hikes will be hard to surpass.
The market now sees a Federal Reserve hike on Wednesday as a near certainty, which could bolster the dollar at the yen's expense. The yield gap between 10-year bonds remains wide, with the hawkish BOJ wagers that have boosted the yen 'totally cancelled out.'