JPY: BoJ expresses more caution over delivering further rate hikes - MUFG

The yen has weakened overnight following the BoJ's latest policy meeting. It has helped to lift USD/JPY back above 144.50 as the pair moves further above the low of 139.89 set on 22nd April. It follows the BoJ's decision to leave the policy rate unchanged at 0.50% while the updated economic projections and risk assessment signaled more caution over delivering further rate hikes, MUFG's FX analyst Lee Hardman reports.

BoJ trims GDP and inflation forecasts

"The BoJ's first updated economic projections since President Trump's 'Liberation Day' tariffs announcement revealed that the forecast for GDP growth in Japan for the current fiscal year was revised lower by 0.6ppts to 0.5% and for the next fiscal year by 0.3ppts to 0.7% before growth is expected to pick back up to 1.0% in FY2027. At the same time, the BoJ's updated projections for core inflation (excluding fresh food) were revised lowered by 0.2ppts to 2.2% for the current fiscal year and 0.3ppts for the next fiscal year after which it is expected to be close to the BoJ's target at 1.9% in FY2027. It supports the BoJ's decision to maintain guidance that it 'will continue to raise the policy interest rate and adjust the degree of monetary accommodation' if its growth and inflation outlook materializes."

"While the BoJ is still signalling that it likely to raise rates further, it now judges that risks are skewed to the downside to both growth and inflation for the current and following fiscal years. The BoJ emphasized that they were facing "extremely high" uncertainties ahead. In the accompanying press conference, Governor Ueda stated that he expected the price trend improvement to stall temporarily and judged that that likelihood of their economic outlook materializing is not as high as before. He believes it is hard to say when they will have more confidence in the outlook which will be needed to hike rate again. The comments reinforce our perception of increased BoJ caution over raising rates further this year."   

"The updated economic projections and risk assessment has further encouraged market participants to push back expectations for the timing of the BoJ's next hike until the end of this year at the earliest. There are currently around 10bps of hikes priced in  by year end. A quick trade deal/agreement between Japan and the US to reverse/water down tariffs imposed on Japan would help to ease downside risks for Japan's economy directly although the BoJ would still likely remain concerned over downside risks to growth outside of Japan setting a higher hurdle for the BoJ to resume rate hikes this year. A slower pace of BoJ policy normalization will help to dampen yen strength in the near-term but is unlikely to reverse the current strengthening trend if global growth continues to slow and other major central banks including the Fed cut rates further resulting in yields spreads continuing to narrow between Japan and overseas."