Japanese Yen: BoJ repricing may limit JPY losses against US Dollar - BBH

Brown Brothers Harriman’s (BBH) Elias Haddad notes that USD/JPY is consolidating just below a multi-decade high as Japan’s private sector growth strengthens and Consumer Price Index (CPI) tracks below Bank of Japan (BoJ) forecasts. Markets expect the BoJ to hold at 1.00% next week, with around 60 bps of tightening priced over twelve months. This leaves scope for higher BoJ rate expectations, seen as supportive for Japanese Yen (JPY).

BoJ outlook and growth pulse support JPY

"USD/JPY is consolidating just under a multi-decade high. Japan private sector growth strengthens to five-month high in July, supporting the BoJ’s hawkish bias. The composite PMI improved to 53.1 vs. 52.8 in June led by the steepest increase in manufacturing production since February 2014 with softer growth in services."

"Japan June CPI largely matched consensus. Headline CPI rose to 1.7% y/y vs. 1.5% in May held in check by government subsidies on energy. Core CPI ex. fresh food increased to 1.6% y/y vs. 1.4% in May, and core CPI ex. fresh food & energy unexpectedly dipped to 1.7% y/y (consensus: 1.8%) vs. 1.8% in May."

"Both measures of core CPI are tracking well below the BoJ’s 2026 forecast of 2.8% and 2.6%, respectively, consistent with a gradual BoJ tightening cycle."

"The BoJ is widely expected to keep rates on hold at 1.00% next week after delivering a well-telegraphed 25bps hike in June. The swaps curve price in a 25bps rate hike by year-end and a total of 60bps of tightening to between 1.50% and 1.75% over the next twelve months."

"That would still leave the policy rate near the middle of the BoJ’s estimated neutral range (1.10%-2.50%) even as the economy runs above potential, leaving scope for an upward adjustment to BoJ rate expectations in favor of JPY."