BoJ Pricing Alone Can't Boost Yen

OCBC Bank's FX strategists argue that the Japanese Yen's recent recovery may be running out of steam, as markets have already priced in further Bank of Japan (BoJ) rate hikes. According to Frances Cheung and Christopher Wong, led by OCBC, the yen's upside is likely constrained because the market has already priced in a significant amount of BoJ tightening.

The analysts point out that overnight index swaps imply a policy rate of around 0.6% by the end of the year, with further hikes expected into 2026. This means that any positive yen reaction to BoJ communications may be muted, as the bar for hawkish surprises has been raised.

The note highlights that the yen's trajectory will increasingly depend on the broader macro environment, particularly US yields and risk sentiment, rather than BoJ policy alone. The strategists say that 'the market needs to see a shift in the global interest rate landscape, or a clear change in Japan's inflation dynamics, to justify a more sustained yen rally.'

The analysts identify several factors that could influence the yen in the coming months, including the trajectory of US Treasury yields and Japan's wage growth and inflation data. They note that if the Federal Reserve cuts rates more aggressively than currently priced, the dollar-yen pair could see a sharper decline.