BoJ hikes but lack of urgency leaves yen vulnerable to intervention

JPY: Ueda signals further hikes to come

USD/JPY has initially spiked on the back of the start of Governor Ueda press conference following the decision to hike the key policy rate by 25bps to 0.75%. The policy rate is now the highest since 1995. The decision was unanimous – back in January when the BoJ last hiked the vote was 8-1. The statement expressed the willingness to raise rates further stating that “the likelihood of realising the baseline scenario has been rising. There was also a slight revision to the description of the economy that points to better prospects of rate hikes ahead. In the October outlook report the BoJ concluded that the “growth pace will stagnate” but today growth “is likely to be moderate”. Of greatest importance though was the description of where rate are now. The BoJ today maintained that real rates remain “significantly low” and “significantly negative”. This is the strongest signal the BoJ could have realistically provided on there being a need for further hikes ahead. Any tweak to that description would have fuelled speculation that the BoJ was moving toward a possible neutral rate that may have warranted greater caution ahead. The current implied terminal rate in the markets is at around the 1.50% level.  

USD/JPY is higher though! Ahead of this meeting there had been some speculation that the BoJ could provide more explicit guidance on where the neutral rate may be. That hasn’t happened but in our view that was an unrealistic expectation. An R* range (-1.0% to +0.5%) has been cited before by Dep Gov Uchida as a broad consensus amongst economists and that likely remain roughly what the BoJ believes. Many central banks shy away from providing a specific level or range and the most important factor today is that the real rate remains “significantly negative” and if there was a view that neutral was approaching that would have been communicated. Ueda has also added that the policy rate is “some distance” from the lower end of the neutral range.

Another factor likely undermining the yen is the perception that there was no great sense of urgency. The gap in rate hikes this year was from one end of the year to the other and there is no sense today of needing to act with greater urgency. Governor Ueda has stated in the press conference that rate hikes “haven’t had  strong tightening effects”. In addition only “some” members noted the need to watch yen moves. The BoJ also expects inflation below 2% in the first half of next year suggesting caution.

The danger today given recent FX price action as rate expectations strengthened was that there would not be enough in this hike to halt yen selling. The yen clearly needs higher front-end rates (2yr yield +2bps today) but Governor Ueda today looks at have merely endorsed current market pricing. 2s10s and 2s30s spreads in the JGB market are a little steeper – another sign of caution on the part of the BoJ. Intervention risks over the quieter Christmas period is becoming a more realistic prospect.

USD/JPY CONTINUES TO DIVERGE FROM BROADER PERFORMANCE OF DOLLAR – BOJ ACTION HAS FAILED TO HALT YEN SELLING

Source: Bloomberg, Macrobond & MUFG GMR

EUR/GBP: BoE more cautious; ECB more in line

We wrote two FX Focus reaction pieces yesterday on the BoE and ECB meetings (here & here) and our key takeaways were that the BoE was more cautious than expected (and more cautious than justified) while the ECB was generally in line with expectations, albeit with a slight hawkish skew given the forecasts.

You certainly get the impression from the BoE that overall amongst the hawks there is not much weight given to the UK economy shedding jobs in slowing down the pace of wage growth. The focus was very much on the risks related to domestically generated inflation via wage growth. Catherine Mann spoke of a non-linear adjustment between job losses and wage growth while Clare Lombardelli mentioned “structural issues” as possibly keeping wages higher despite job losses. Megan Greens spoke of “resilient corporate balance sheets” buffering labour market adjustments.

Nearly all the hawks referenced forward-looking measures of wages as being too high and in this regard the BoE Agents annual pay survey will be a key determinant in shaping forecasts and views and will be available to the MPC ahead of the February meeting but only released to the markets at that meeting. The early indication is pay settlements would be in or around 3.5% - still too high for comfort. Indeed, the November Decision Makers’ Panel indicated a pick-up in wage growth to 3.8%.

It is somewhat surprising that the focus was so much on these forward looking indicators that still may not be capturing the scale of job losses more recently and there was not much reference amongst the hawks to the pick-up in the pace of firing. There have been 88k job losses in the last three months of data to November. Job losses this year amount to 154k. We would be surprised if that scale of decline in jobs didn’t have a meaningful impact on slowing wage growth especially given that slowdown in wage growth is already under way in the official wage data.

So we would not expect this BoE caution to have a lasting impact on providing support for the pound. A rate cut from the BoE by March remains likely and that is priced as less than a 50% probability currently.

There is less to talk about in terms of the ECB meeting. Why would President Lagarde communicate a message that would result in a shift in expectations when the message remains that monetary policy is “in a good place”. The OIS curve is basically flat for 2026 reflecting ECB messaging. The forecast updates were the hawkish element from yesterday’s meeting. Real GDP growth was revised 0.2ppt higher for this year and next to 1.4% and 1.2% respectively. Headline inflation was revised 0.2ppt higher for next year to 1.9% but 0.1ppt lower to 1.8% in 2027. The first 2028 forecast was 2.0%. We have already removed the one rate cut we had expected in 2026 from the ECB and yesterday’s meeting was consistent with that view. We see EUR/GBP drifting higher over time, mainly on the assumption that the MPC fears over wage growth risks will prove incorrect.

RECENT PICK UP IN DMP SURVEY EXPECTED WAGES IS ONE MPC CONCERN

Source: Macrobond, Bloomberg & MUFG Research

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com