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30/07/24
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JPY Slips, Focus on Bank of Japan
In the second half of July, the Japanese yen was strong, but it lost momentum this week. USD/JPY traded at about 154.88, up 0.57% for the day in the European session.
The Bank of Japan will meet early on Wednesday and the markets don’t know what to expect. Markets have priced in a 65% probability of a 0.10% hike, which would take rates to between 0.1% and 0.2%. Some economists expect an increase of 0.15% or even 0.25%.
Although inflation is higher than the BoJ’s 2% inflation target is still relatively moderate. This means it won’t really be a factor in tomorrow’s decision. As it is widely expected the Fed will cut rates in September, the US/Japan rate differential will narrow, reducing the pressure on the BoJ to increase rates.
It is also expected the BoJ will give details on a plan for quantitative tightening to reduce bond buying by about 50% in the next 12 to 18 months. That would help contain inflation and apply upward pressure on interest rates.
After the BoJ policy meeting, the Federal Reserve will meet later on Wednesday. There will likely not be any drama around rates, as it is virtually certain the Fed will hold the benchmark rate at 5.25%-5.5%, where it has been since July 2023.
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