JPY continues to trade at weaker levels undermined by BoJ policy concerns

JPY: Loose BoJ policy remains a headwind for the yen

The yen has strengthened modestly overnight resulting in USD/JPY falling back below the 156.00-level after hitting a high yesterday of 156.82. The yen has derived some support overnight from comments by Prime Minister Takaichi who reiterated that the specifics of monetary policy should be left to the BoJ, and that she expects the BoJ to manage policy toward their 2.0% target. She emphasized as well that the BoJ does not aim to influence foreign exchange rates. The comments will help to dampen speculation in recent days that Prime Minister Takaichi is attempting to put more pressure on the BoJ to slow down the pace of policy normalization. US Treasury Secretary Scott Bessent has previously stated that he believes that yen weakness reflects the slow pace of BoJ policy normalization. Japan would likely face strong pushback from the Trump administration if Prime Minister Takaichi forced the BoJ to keep monetary policy looser for longer encouraging further yen weakness. Nevertheless, the nomination yesterday of two dovish new BoJ board members (click here) by Prime Minister Takaichi’s government who are known to be strong supporters of reflationist policies in Japan have added to unease over the pace of policy normalization going forward. Market participants are not expecting a significant change to the outlook for BoJ policy in the near-term, and are still pricing in high probability of the next rate hike being delivered as soon as in April (around 17bps are currently priced in) and a further rate hike is almost fully priced in by year end.

The Yomiuri newspaper has reported that BoJ Governor Ueda will examine the impact of the December and earlier rate hikes when deciding on next interest rate increases. The report added that he stressed his intention to continue rate hikes in line with improvements in the economic and price situation. He emphasized as well that the BoJ cooperates with the government on monetary policy management. Overall, the comments gave nothing away about the potential timing of the next rate hike. In contrast, the BoJ most hawkish board member Hajime Takata was more vocal overnight in calling for more rate hikes. He stated “I believe the bank should make a further gear shift, and engage in communication that assumes that the price stability target is almost achieved”. When asked about how he was likely to vote on policy at the March or April policy meetings, he stated that he wanted to make a decision each time but his view hasn’t changed that the price target has been achieved more or less”. He voiced concern that Japan might face greater-than-expected upswings in prices if overseas factors that push up prices emerge”.

A weaker yen and /or higher price of oil triggered by military tensions in the Middle East are two immediate upside risks for inflation. A US delegation including special envoy Steve Witkoff are set to meet today with Iranian officials including Foreign Minister Abbas Araghchi for talks in Geneva in another attempt to reach a diplomatic solution and prevent military action in Iran. We remain wary of the risk of a more significant and sustained spike higher in the price of oil which would increase downside risks for currencies from energy importing countries such as Japan and Europe, and undermine our outlook for further US dollar weakness this year.                                

EUR/GBP VS. SHORT-TERM YIELD SPREAD

Source: Bloomberg, Macrobond & MUFG GMR

GBP: BoE policy expectations & UK political risks in focus

The pound has strengthened at the start of this week resulting in EUR/GBP falling back towards the 0.8700-level after hitting a high last week at 0.8752. The pound has derived some support from evidence of stronger UK growth momentum at the start of this year, and from comments by BoE Governor Bailey who did not strongly signal he was likely to vote for cut at the next policy meeting in March. The UK rate market has moved to slightly scale back expectations for a rate cut next month but is still pricing in around 18bps of cuts. When asked if he had seen enough further evidence to feel that I’m confident to take that step and vote for a cut, he stated that “it’s a genuinely open question at the moment”. He also expressed disappointment that services inflation did not fall as much as hoped in the latest CPI report for January.

Political risks in the UK will also be in focus at the end of this week and could potentially have an impact on pound performance. The by-election in Gorton and Denton is taking place today. Labour won in Gorton and Denton by a comfortable 37 percentage point margin in the general election just 19 months ago. However, the latest opinion polls have been indicating that it is a close 3-way race to retain the seat. An Opinium poll put the Greens on 30% followed closely behind by Labour on 28% and Reform on 27%. A defeat for the Labour party could increase pressure on Keir Starmer’s position as prime minister and would add to Labour party concerns over their sliding popularity ahead of the local elections in May. Manchester mayor Andy Burnham was stopped from representing the Labour party in the by-election. It would raise further questions over the judgement of the Labour leadership if the seat is lost. As a result, a defeat for Labour has the potential to trigger at least a temporary sell-off for the pound.

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com