Japanese Yen remains directionless ahead of BoJ interest rate decision

• Ahead of the BoJ’s monetary policy decision, USD/JPY remains broadly unchanged.
• With rates expected to remain unchanged on Friday, traders await BoJ guidance on a possible December increase.
• Despite US inflation and GDP figures sustaining hawkish Fed expectations, the Dollar finds little support.

Friday’s Bank of Japan (BoJ) monetary policy decision is keeping traders cautious, with USD/JPY broadly flat on Thursday. Although the Japanese Yen (JPY) is lagging most major currencies, weakness in the US Dollar (USD) is limiting the pair’s upside. USD/JPY stands at around 157.90 at the time of writing.

After raising rates by 25 basis points (bps) in September, taking this year’s cumulative tightening to 50 bps, the BoJ is widely expected to leave interest rates at 1.25%. Holding steady would allow policymakers longer to evaluate the impact of earlier increases on borrowing conditions and economic activity.

As an unchanged decision on Friday is largely anticipated, the focus will shift to revised growth and inflation projections and Governor Kazuo Ueda’s press conference. A further rate increase is expected by traders in December, with higher energy prices and the weak Yen’s impact on import costs adding to inflationary pressure.

Prices excluding fresh food climbed 2.1% YoY in the latest inflation release, compared with 1.7% previously and above the BoJ’s 2% target. Stripping out both fresh food and energy, inflation accelerated from 1.9% to 2.4%. Japan’s October Tokyo Consumer Price Index (CPI) and September unemployment data, due before the policy decision, will offer a further assessment of price pressures and labour market conditions.

For currency markets, guidance on the year-end outlook matters more than the immediate decisions at forthcoming BoJ meetings, according to analysts at Commerzbank. They note that “for FX markets, the more important question will therefore be what the BoJ signals about December.” The analysts highlight that “markets currently price in an around 80% probability of a rate hike by then,” describing this as “in line with our own expectation that the BoJ will raise the policy rate to 1.5%.” Their assessment is that “recent BoJ communication, alongside the economic backdrop, increasingly suggests that the next step towards policy normalization is approaching.”

Thursday’s releases from the United States (US) showed increases in annual headline and core PCE inflation, alongside stronger-than-forecast third-quarter GDP growth. While personal income and spending undershot expectations, jobless claims came in below forecasts, indicating that layoffs remained low.

Following Wednesday’s decision by the Federal Reserve (Fed) to leave rates unchanged, the latest figures leave a December increase firmly on the table. The US Dollar nevertheless finds it difficult to retain its early gains following the releases. Having touched an intraday peak of 102.33, the US Dollar Index (DXY), a measure of the Greenback against a basket of six major currencies, slips back towards 102.00.