BoJ Rate Hike Expectations at Risk of Disappointment

Market expectations are high for a 25bps rate hike to 1.25% by the Bank of Japan (BoJ) in its upcoming monetary policy decision, scheduled for tomorrow.

According to MUFG's Halpenny, the BoJ will likely deliver a clear plan to raise rates further, consistent with the coordinated efforts between Japan and the US to strengthen the yen.

However, there is a risk that Governor Ueda may sound cautious versus aggressive market pricing for 90bps of hikes over the next 12 months. This could lead to disappointment and potentially lift USD/JPY.

The 2-year US-JP swap spread has already signaled upside risks to USD/JPY based on co-movement over the last twelve months, with a 30bps higher spread since December last year.