Brown Brothers Harriman’s Elias Haddad observes that USD/JPY is consolidating just below a multi-decade high as Japan’s private sector growth strengthens and Consumer Price Index (CPI) readings come in below Bank of Japan (BoJ) forecasts. Markets anticipate the BoJ will hold rates steady at 1.00% next week, with approximately 60 basis points of tightening already priced into the swaps curve over the next twelve months. This pricing leaves room for higher BoJ rate expectations, which is widely viewed as supportive for the Japanese Yen (JPY).
BoJ outlook and growth pulse support JPY
“USD/JPY is consolidating just under a multi-decade high. Japan private sector growth strengthens to a five-month high in July, supporting the BoJ’s hawkish bias. The composite PMI improved to 53.1 from 52.8 in June, led by the steepest increase in manufacturing production since February 2014, alongside softer growth in services.”
“Japan’s June CPI largely matched consensus. Headline CPI rose to 1.7% year-over-year from 1.5% in May, held in check by government subsidies on energy. Core CPI, excluding fresh food, increased to 1.6% year-over-year from 1.4% in May, while core CPI excluding fresh food and energy unexpectedly dipped to 1.7% year-over-year (consensus: 1.8%) compared to 1.8% in May.”
“Both measures of core CPI are tracking well below the BoJ’s 2026 forecast of 2.8% and 2.6%, respectively, consistent with a gradual BoJ tightening cycle.”
“The BoJ is widely expected to keep rates on hold at 1.00% next week, following a well-telegraphed 25 basis point hike in June. The swaps curve is price in a 25 basis point rate hike by year-end and a total of 60 basis points of tightening to between 1.50% and 1.75% over the next twelve months.”
“That would still leave the policy rate near the middle of the BoJ’s estimated neutral range (1.10%-2.50%) even as the economy runs above potential, leaving scope for an upward adjustment to BoJ rate expectations in favor of JPY.”
Also Read
- Pakistan and Iran Investigate Reopening US Diplomatic Channels via Chinese Mediation
- XRP Downtrend Mirrors 2017 Symmetrical Triangle Preceding a 66,000% Rally
- EU Enacts Broad Sanctions Targeting $120 Billion Russian Crypto Network
- Euro Holds Near 12-Week Peak Versus Yen as Strong Eurozone PMI Counters BoJ Uncertainty
