JPY: Appetite to sell yen remains limited as BoJ rate hike expectations build

The FX markets are relatively calm this morning with no notable moves in the G10 space bar a drop in the New Zealand dollar after a surprise jump in the unemployment rate in today’s Q2 labour market data. Crude oil prices are only modestly further lower on continued positive noises that a new ceasefire deal is imminent. USD/JPY remains stable as well although today we saw further evidence to suggest that the BoJ could be moving toward a faster pace of monetary tightening. The minutes of the June BoJ policy meeting, when the BoJ raised rates to 1.00%, revealed that several members believed that monetary conditions would remain accommodative after that agreed rate hike. It was also evident in the minutes that inflation risks would remain to the upside and that there was a possible justification in considering a faster pace of monetary tightening to manage upside inflation risks.

The June meeting was also when the BoJ confirmed that the reduction in JGB purchases would be halted from April 2027 at a level of JPY 2trn per month. This was widely expected but interestingly media reports indicated that PM Takaichi had requested in May for the BoJ to increase purchases of JGBs if required to contain longer-term yield rises. Governor Ueda is reported to have responded that the BoJ would “take appropriate action if required”. While the BoJ has denied political influence in the ultimate decision in June to halt the reduction in JGB purchases the signs were certainly there of possible political influence. We believe this example serves as a reminder of the closer relationship between the government and the BoJ than in other major developed economies.

It therefore gives context to the current focus on the BoJ raising the policy rate sooner in order to align itself with the latest attempts by the government to halt the depreciation of the yen. US Treasury Secretary Scott Bessent made his views pretty clear yesterday in a CNBC interview stating that he was “highly confident” that Japan would follow up the intervention with policy actions. He also stated more clearly that he was confident that BoJ Governor Ueda “would do what is needed”.

The minutes today certainly opened up the prospect of a sooner rate hike. The implied probability of a September hike has now increased to close to 60%. Data released today also reinforces the prospect of a hike. Labour cash earnings increased 3.4% YoY in June, up from 3.2%. The same sample reading that the BoJ monitors for consistency jumped sharply, from 2.9% to 4.4%. This is yet more data indicating upside inflation risks that we believe should convince the BoJ to raise rates in September – a development that would help back up the intervention especially if a deal for a more lasting Middle East ceasefire is about to be announced in the meantime.

JAPAN TOTAL CASH EARNINGS (SAME SAMPLE) JUMPED SHARPLY IN JUNE

Source: Bloomberg, Macrobond & MUFG Research

USD: Labour market conditions remain non-inflationary

UST bond yields fell again yesterday, and the 2-year yield is now down 16bps from the high in July as some of the Fed tightening expectations are taken out of market pricing. The 2-year spread over the fed funds rate remains excessive in our view and we remain sceptical of the view that the Fed will be hiking rates this year. One core part of that view is admittedly the harder element to predict – that the Trump administration do not want an escalation in the conflict in the Middle East, do not want inflation risks rising further and hence will push to get another ceasefire agreed with Iran. That looks to be playing out currently with Scott Bessent stating yesterday that the US is in talks with Iran and a deal to reopen the Strait of Hormuz could be agreed “today or tomorrow”. There are widespread reports today that a deal is imminent. That prompted a notable drop in Brent crude oil prices that if sustained would go a long way to alleviating the expectations of Fed rate hikes this year.

While day to day prices in crude oil are unpredictable what is certainly more consistent is the lack of any inflationary pressures stemming from the US labour market. The JOLTS data for June was released yesterday and revealed a decline in job openings that was a little more than expected with the quits rate stable at 2.0%. The JOLTS hiring total has been relatively stable around the 5mn mark, close to the combined quit and layoff total. The total job openings level is currently similar to the number of unemployed highlighting a labour market close to equilibrium, implying little upward pressure coming through in wages. The hiring total has also been closely aligned with the pace of nonfarm payrolls growth, and the JOLTS data certainly points to the recent upturn in the pace of nonfarm payrolls growth as being unsustainable.

The consensus for Friday’s nonfarm payrolls increase is 80k and today’s data is certainly consistent with payrolls growth remaining below the 100k level.

Reaching an agreement on a ceasefire would be a key event for the rates market and would likely prompt some further declines that would drag the dollar further lower from here. But the labour market data this week is next most important for driving rates and yesterday’s JOLTS data certainly points to limited domestically generated inflation pressures that will help contain rates. A rates and dollar drop would only go so far though over the short-term given the potential scepticism in the markets over whether any new ceasefire would actually hold over the medium-term.

JOLTS HIRING INDICATIVE OF NONFARM PAYROLL GAINS AT A MORE MODEDERATE PACE BELOW 100K PER MONTH

Source: Bloomberg & MUFG Research