Yen Weakness and Rate Outlook to Dominate BOJ Meeting

The continuing weakness of the Japanese yen is expected to be a key topic of discussion at this week's BOJ monetary policy meeting, during which officials decide whether to adjust interest rates.

BOJ Unwilling to Step In

Earlier in the week, the US dollar exceeded 155 against the yen, its highest level against the yen since the 1990s. This came after the Japanese government issued its strongest warning yet regarding currency moves. The yen has steadily weakened following the BOJ's previous meeting, during which the bank hiked for the first time in over a decade. However, the gradual pace of the tightening signalled that Japanese authorities were unwilling to intervene in support of the currency, allowing further depreciation.

Despite the yen's weakness, most analysts expect the BOJ to keep policy unchanged and rely on communications to guide expectations. The bank already faces a complex situation of relatively high inflation, expected to cool substantially in the near term alongside a slowing economy. With little room to tighten further, given interest rate differentials with major currencies, the intervention appears to be a limited tool to slow capital outflows supporting carry trade activity.

It Comes Down to Forecasts

The BOJ's quarterly economic forecasts are seen as particularly important this time. Most expect they point to sluggish domestic growth this year, with inflation around target. Given Governor Kazuo Ueda's data-dependent stance, this scenario implies no hikes any time soon.

As such, any significant yen appreciation may depend more on Fed policy. Should the Fed act on expected rate cuts, the BOJ could take some relief later this year. This is why reactions in USDJPY may hinge more on upcoming US data releases a few hours after the BOJ decision, such as the PCE price index. Fed's favourite measure of inflation is projected to contradict recent CPI figures again and signal ongoing Fed easing.

USDJPY Near Handle Projection

The USDJPY pair has continued higher after forming a somewhat extended cap-and-handle (C&H) pattern. This pattern projects a target price of 163.60 based on the measured move of the handle spanning from 151.90 to 140.25. In the near term, bulls may face resistance around 157.15 due to the expansion of the recent leg higher from 140.25 to 150.88, considering a correction low of 146.48. If bulls are able to hold support at 153.60 firm, prices could accelerate upwards. Otherwise, a decline could open the door to a potential reversal down to the breakout point.

Source: SpreadEx / SPOT, USD/JPY

Key Takeaways

The Japanese yen's continued weakness will be a key topic at this week's BOJ meeting. While the yen hit its lowest point against the US dollar since 1990, most analysts expect the BOJ to keep policy unchanged and rely on communications to guide expectations. With inflation expected to cool and economic growth slowing, the BOJ has little room to tighten further, given interest rate differentials. Its economic forecasts, crucial this time, will likely point to sluggish growth and inflation around the target. This implies interest rates will remain unchanged in the near future, with any significant yen appreciation likely depending more on Fed and upcoming US data releases.