The Bank of Japan has demonstrated a notable degree of inconsistency in its policies, leading to significant fluctuations in the USDJPY exchange rate. In December, Kazuo Ueda had no intention of raising the overnight rate in January. Today, he keeps the door open for a rate hike. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bank of Japan awaits market reaction to Trump’s inauguration.
- US tariffs could prolong a BoJ pause.
- An overnight rate hike odds have jumped to 99%.
- The USDJPY pair may soar to 160 or slump to 153.
Weekly Fundamental Forecast for Yen
Following the December meeting of the Bank of Japan, many experts doubted the likelihood of a normalization cycle in January. Obstacles such as a lack of data on wage trends, uncertainty surrounding Donald Trump’s policies, and government pressure appeared insurmountable. As a result, the USDJPY pair surged to six-month highs before experiencing a decline.
A week before the Bank of Japan’s January meeting, BoJ Governor Kazuo Ueda and Deputy Governor Ryozo Himino stated that the door for an overnight rate hike was open, and at least two of the three obstacles were left behind. A series of strong economic data, including inflation, has assured the government that normalizing monetary policy was a necessity.
Finance Minister Katsunobu Kato stated that rates were aligning with wage and inflation trends, emphasizing the central bank’s responsibility to implement monetary policy in a manner that contributes to achieving the price stability target. In response to the comments from the Bank of Japan and government officials, the derivatives market increased the odds of an overnight rate hike in January from 61% to 99%.
Market Expectations on BoJ Overnight Rate
Source: Bloomberg.
Experts at Bloomberg have also adjusted their outlook. In the previous survey, 52% of experts voted in favor of the January tightening of monetary policy. This figure increased to nearly 75% ahead of the Board of Governors meeting. Daiwa Securities considers an increase in the overnight rate from 0.25% to 0.5% a foregone conclusion and views Donald Trump’s tariffs as the sole remaining obstacle. The fact that Japan is not the main target of these measures may calm USDJPY bears.
Economists’ Forecasts for BoJ Rate
Source: Bloomberg.
The Bank of Japan has reportedly reconsidered its strategy, likely influenced by the weak yen and the US dollar’s rally to ¥160. This has led to concerns both within the BoJ and the government, potentially prompting a response in the form of currency intervention following the release of strong US employment statistics for December.
According to Bloomberg, Kazuo Ueda and his team are expected to delay the decision on interest rates until the last minute to assess the impact of Donald Trump’s inauguration on financial markets. The officials are confident in the Bank of Japan’s forecasts, and the January meeting is expected to proceed as scheduled to continue the normalization cycle.
Weekly USDJPY Trading Plan
The USDJPY pair’s trajectory will be influenced by US Treasury yields and the BoJ decision. Furthermore, maintaining the overnight rate at 0.25% will allow traders to switch from short-term long trades with a target of 160 to short trades on expectations of a rate hike in March. The rise in borrowing costs will generate a signal to open short positions with targets of 154.5 and 153, followed by a subsequent reversal.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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