Japanese Yen: High bar for hawkish BoJ repricing – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad reports USD/JPY is consolidating around 162.00 after touching a 40‑year high near 162.84. Japan’s May wage data softened, and underlying Bank of Japan (BoJ) Consumer Price Index (CPI) indicators eased further below 2%, suggesting limited inflation pressure. Haddad concludes the bar for a hawkish BoJ repricing is high, which should cap Japanese Yen relief rallies despite current rate expectations.

JPY relief rallies seen as limited

"USD/JPY is consolidating around 162.00 after surging to a 40-year high at 162.84 last week. 30-year JGB yields dropped as much as 10bps to 4.00% on solid buying interest from investors. The 30-year bond sale's average bid-to-cover ratio was 4.55 vs. 2.94 in June, the highest since May 2019."

"Japan’s May labor cash earning data was soft due to effect. Total nominal wage growth slowed more than expected to 3.2% y/y (consensus: 3.4%) vs. 3.6% in April. The less volatile scheduled pay growth for full-time workers cooled to a five-month low of 2.4% y/y vs. 2.5% in April."

"Overall, Japan wage growth is not a major source of inflation pressure given annual total factor productivity growth of about 1%. Indeed, most of the BoJ’s underlying CPI indicators eased further below 2% in May."

"The bar for a hawkish BoJ repricing is high, limiting JPY relief rallies. The swaps curve price in nearly 50bps of hikes to 1.50% in the next twelve months, which looks broadly appropriate."