USDJPY Traders Brace for BOJ Decision

Rising prices have placed the first BOJ policy meeting for the year in the "live" territory despite an unstable economy.

To Finally Hike?

Despite economic uncertainties and rising inflation, the BOJ is widely expected to raise interest rates by 0.25% during its monetary policy meeting on Friday. This would mark the third rate hike in the current cycle, doubling the rate to 0.5%. Market expectations for a rate hike exceed 90% currently, with the decision followed by the release of the latest inflation figures. CPI is expected to accelerate in both headline and core consumer prices to 3.2% and 2.6% from 2.9% and 2.4%, respectively.

Analysts suggest that USDJPY has weathered the impact of the inauguration of Donald Trump, as expected tariffs on Asian economies did not materialise, leading to a weakening of the US dollar. This has allowed the Japanese yen to regain some of its losses, aided by verbal interventions from officials to prevent the pair from breaching the 160.00 level earlier in the month. A recent Bloomberg survey in fact showed that 70% of economists believe it is time for the BOJ to go ahead with a rate hike as it has been foreshadowed by Governor Kazuo Ueda for months.

Clouded Outlook

Beyond the consensus surrounding the upcoming meeting, there is significant uncertainty about the BOJ's future policy stance. Analysts and the BOJ itself have cited the need to scrutinise the impact of Trump's policies on the market before taking a more definitive position. After the last meeting, Ueda acknowledged that the outlook for the global economy is vague, a sentiment echoed by his Deputy, Ryozo Himino, who highlighted the US as a major factor in the decision-making process while emphasising the consideration of all economic factors. This situation could result in more vague guidance from the BOJ than usual, potentially causing apprehension in the market about how to react.

Given the virtual agreement among economists that the BOJ will hike rates this quarter, if there is no rate increase after the meeting, the market will likely assume that the BOJ will hike at the next meeting. This could limit market reaction unless Ueda delivers a particularly dovish commentary after the rate decision or the inflation data surprises on the downside. However, with other central banks looking to cut rates, further rate hikes from the BOJ might not emerge for an extended period. The growing consensus of a rate hike has helped support the yen over the past couple of weeks, which could stall if markets conclude that the BOJ will not deliver any further tightening for a prolonged period.

Bullish Flag or Further Drop

The USDJPY chart shows a bullish flag pattern that might have ended at 154.00, a pattern that typically signals a continuation of the preceding uptrend. If the pair continues to trade above the upper trendline of the flag, it could resume the uptrend towards 158.65, the height of the flagpole projected from the breakout point of 154.80. In the interim, resistance levels at 156.84 and 157.82 must give way to bulls. Conversely, reversing lower could see prices fall below 155.00 and towards the flag low, eventually sliding further. This could open the door to 152.87.

Source: SpreadEx / USDJPY

Key Takeaways

The BOJ is expected to hike rates at its upcoming policy meeting, but while this is largely priced in, traders will look for cues on future policy in guidance and post-event commentary. The USDJPY has shown strength amid global economic uncertainties due to the growing consensus for a rate hike. However, further tightening from the BOJ might still be limited in the near term.