BoJ rate hike pause priced in but Ueda hints at faster pace
The market is currently pricing in a pause in the Bank of Japan's (BoJ) rate hikes, with traders giving only a 25% chance of an increase on October 30. However, BoJ Governor Kazuo Ueda's recent remarks hint at continued rate hikes, which could trigger a sharp repricing of the Yen if the BoJ's upcoming report signals a faster pace.
The gap between the US Federal Reserve's rate and the BoJ's rate remains significant at 2.75 percentage points, despite both institutions raising rates in September. The Yen weakened after both the June and September hikes, indicating that single hikes barely narrow this gap. The BoJ's rate is now at 1.25%, while the Fed's rate tops out at 4.00%.
Inflation in Tokyo hit 2.7% year-over-year in September, surpassing the BoJ's target. Governor Ueda emphasized the importance of anchoring inflation around 2%, citing risks like the Iran conflict, AI-driven demand, and the weak Yen. The BoJ's report, due after its October 29-30 meeting, is expected to indicate that underlying inflation has reached 2%, potentially closing an 18-month window mentioned in the July report.
The Fed meets two days before the BoJ, and market odds suggest a slight chance of a Fed hike on October 28. A Fed hike would widen the rate gap, while a BoJ hike signal could strengthen the Yen. The USD/JPY pair has been trading between 156.50 and 159.00, with a daily close below 157.00 potentially triggering further declines.