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Japanese yen faces downside as US-Japan rate gaps may narrow

BBH says swaps currently price 64.0% odds of a BoJ hike to 1.25% at the September 18 meeting, but the balance of risks points to weaker USD/JPY over coming months.

Reported · Written up by our desk · Major Pairs

Brown Brothers Harriman analyst Elias Haddad said the Japanese yen has been underperforming as firmer oil prices support USD/JPY, even though the latest Bank of Japan (BoJ) meeting minutes did not materially change rate expectations. Haddad pointed to the potential for US Japan interest rate differentials to narrow, citing a risk skew that could favor a weaker USD/JPY trajectory. In that view, BoJ risks are more hawkish, while Federal Reserve risks are more dovish, which would tend to pressure the dollar versus the yen.

According to the note, the swaps curve is pricing 64.0% odds that the BoJ will raise its rate to 1.25% at its next September 18 meeting. Haddad also referenced that in July the BoJ voted 8-1 to hold the policy rate at 1.00% while keeping a hawkish bias.

The analysis added that the BoJ rate is near the lower end of its neutral range estimate of 1.10% to 2.50%, while Japan’s economy is operating above potential. It contrasted that with the Fed setting policy as restrictive under a neutral rate assumption of 3.00%, with the US economy operating around potential, as context for the expected narrowing in rate differentials.

Latest closeUSD/JPY 158.52 ▲0.6%

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