The Bank of Japan (BOJ) maintained its short-term interest rate target at 0.25% at today’s policy meeting, while signaling increasing confidence in the economic outlook that could pave the way for further monetary tightening as early as December.
Link to official Bank of Japan Statement and Economic Outlook
Key Points from the BOJ Statement:
- Short-term interest rate target held steady at 0.25%
- Core inflation forecast for fiscal 2025 trimmed to 1.9% from 2.1%
- BOJ projects inflation to remain around 1.9% through fiscal 2026
- Economic growth forecasts maintained at 0.6% for current fiscal year
- Growth projections of 1.1% and 1.0% for fiscal 2025 and 2026 respectively
Significant Shift in Communication
In a notable departure from previous messaging, Governor Kazuo Ueda dropped the central bank’s earlier stance that it could “afford to spend time” assessing risks. Instead, he struck a more optimistic tone, particularly regarding external threats to Japan’s economy.
“Looking at domestic data, wages and prices are moving in line with our forecasts. As for downside risks to the U.S. and overseas economies, we’re seeing clouds clear a bit,” Ueda stated during the post-meeting press conference.
Japanese yen vs. Major Currencies: 5-min
Overlay of JPY vs. Major Currencies Charts by TradingView
The Japanese yen responded strongly to both the policy announcement and subsequent press conference, rallying on both events as traders took both (especially the governor’s less cautious tone on the economic outlook) as fuel to price in higher odds of a rate hike from the BOJ in December.
The move topped out during the mid-morning London session and reverse to pre-press conference levels and below. This may have been a reaction to BOJ Ueda’s comments on not having a preset rate hike expectation. This may have fueled profit taking from the event, as well as repositioning ahead of top tier events during the U.S. session. That’s where we essentially saw the bottom of the pullback.
Market focused shifted and the Japanese yen seems to have benefitted greatly from the broad risk aversion lean during the U.S. session, largely driven by a round of net positive U.S. economic updates (most notably a rise in the U.S. PCE Index growth rate, as well as personal income and spending rates).
U.S. election concerns may be a factor as well in the turn towards risk-off as we head closer to the November 5th event.
