BoJ picks point to near-term yen downside risks

JPY: Do reflationists indicate Takaichi’s direction?

The State of the Union address from President Trump last night was predictable in pushing a view from the White House that everything is great – including the view that “inflation is plummeting”. That’s unlikely to be a view shared by many voters with polling indicating a net negative approval on handling both the economy and inflation. There was nothing in the way of notable policy announcements although he did warn Iran confirming that he will never allow Iran to obtain a nuclear weapon and that he believed Iran had resumed its “sinister” pursuit of nuclear weapons. UST bond yields and the dollar were broadly unchanged through the speech although the dollar today is clearly weaker, although for no single clear reason.

High inflation in Australia is one factor that has weakened the dollar versus AUD with the RBA now expected to hike at the May meeting. The pound is a little stronger too due to BoE comments yesterday (see below). NOK is stronger on the back of higher crude oil prices following Trump’s Iran comments last night. There is a clear underperformer today though (and yesterday) and that’s the yen with the government today announcing the picks to replace Asahi Noguchi at the end of March and Junko Nakagawa at the end of June. PM Takaichi has nominated Toichiro Asada, a Chuo University Professor and Ayano Sato, an Aoyama Gakuin University Professor to replace the departing policy board members. Asada is well known for his reflationist views having co-authored work with former deputy governor Wakatabe in the past. He also served as a lecturer for the LDP’s Fiscal Policy Review Committee, a party group advocating for fiscal expansionary policies.

Sato is less recognised in this vein but has also lectured in LDP circles that advocate fiscal expansion and has worked closely with those recognised for those policy leanings.

We can’t be sure this will change the policy board dramatically especially given the two departing members were on the dovish side. But these selections come in the same week that we have had media reports that Takaichi last week pressured Governor Ueda to act more cautiously going forward. The Nikkei also reported that it was the US that instigated checking rates in USD/JPY in January and not Tokyo implying Tokyo indifference to yen weakness.

15bps worth of BoJ tightening is priced for April and whether that pricing is endorsed over the coming weeks will be crucial. These picks do not necessarily mean Takaichi is opposed to some nearer-term tightening. Policy board member Takata gives a speech tomorrow, but he is a known hawk so more important will be the speech from Deputy Governor Himino on Monday in Wakayama. If an April hike is being considered we would expect Himino’s tone to at least be consistent with that possibility. If he fails to do that there is an increased risk of further yen selling.

RBA RATE HIKE EXPECTATIONS & CRUDE OIL DRIVE G10 TOP PERFORMERS

Source: Bloomberg & MUFG GMR; ytd rates as of 07:45 GMT 25th Feb 2026

GBP: A finely balanced decision in March

Front-end yields nudged a little higher yesterday, by a couple of basis points, with the probability of a rate cut declining modestly, which helped the performance of the pound – the pound was at one stage the top performing G10 currency yesterday, although the gain was modest and partially reversed by the end of the trading day. The catalyst for these moves was the BoE testimony to the Treasury Select Committee on the Monetary Policy Report released earlier this month.

The scale of the moves in front-end yields feels about right to us – it’s understandable that the comments delivered indicate that the decision in March on the data available as of now is very finely balanced. We already know how sensitive some MPC members are to information on underlying inflationary pressures and it’s clear from yesterday’s comments that there was some disappointment in response to the latest CPI data. The UK media celebrated the headline drop to 3.0% but some MPC members were less enthusiastic highlighting the evidence of still sticky underlying inflation. Governor Bailey stated in parliament that services inflation “didn’t fall as much as hoped” and that it was a “genuinely open question” whether there is enough evidence of disinflation to warrant a cut in March. His bias is clearly in that direction though and he said he would go into upcoming meetings asking if a cut is justified. 

What came across as pretty clear to us is that the hawks who testified in parliament yesterday – Megan Greene and Huw Pill – are not for turning at this stage and we can assume they will continue to resist calls for monetary easing. On the other hand, Alan Taylor will continue to vote favouring monetary easing given he stated that “growing downside risks have materialised”.

The summaries of individual views at the 5-4 decision in February certainly then suggested that either Governor Bailey or Catherine Mann would be the voters most likely to switch and vote for easing. Bailey’s comments yesterday were balanced enough to keep that prospect alive and hence the relatively marginal move in rates and FX. Catherine Mann did not testify yesterday but her comments last week were perhaps more revealing than Bailey’s yesterday. Last Thursday Mann stated that rising unemployment was “very much of a concern” and that the fall in goods inflation was “better than I had hoped for”. That could prove key at the next meeting.

It does though emphasise the importance of the next jobs report, which will be released on the same day as the MPC decision (19^th March). The MPC will probably have that information on 18^th March when deliberating the decision. If the data continues to show the gradual softening of labour market conditions that we have seen for many months now, then we believe a cut is likely. That remains our view and with inflation set to fall to target in May, another cut in June is very likely. So the OIS curve is under priced at this point and we see scope for further GBP underperformance over the coming months.

EUR/GBP RISK-REVERSAL SKEWED TO THE UPSIDE

Source: Bloomberg & MUFG Research

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com