On Thursday, after the Bank of Japan kept interest rates unchanged, the yen broke through several levels, declining over 1% against the dollar, reaching its lowest level since July.
After Bank of Japan Governor Kazuo Ueda stated at a press conference following the decision that the direction of the spring wage negotiations next year needs to be observed before deciding on policy, the yen against the dollar momentarily fell below 157, as this comment raised doubts about whether the Bank of Japan would raise rates in January.
Overnight index swaps indicate a 49% probability of the Bank of Japan raising rates at its next policy meeting in January.
The yen breaking below the 157 level is significant, as this move puts the yen into a range closely monitored by forex strategists. They believe this decline could trigger verbal intervention from Japanese authorities and intensify pressure on the Bank of Japan to raise rates sooner.
Shoki Omori, chief Japanese forex strategist at Mizuho Securities in Tokyo, stated, 'Market expectations seem to believe that there is little possibility of a rate hike at the January meeting next year, as it does not align with the spring wage negotiations. Although the Bank of Japan may maintain flexibility, the market may become skeptical.'
In recent weeks, market expectations for interest rate hikes by the Bank of Japan have weakened, leading to a continuous decline of the yen against the dollar for six days, marking the longest drop since June.
Earlier this month, foreign media quoted insiders as saying that Bank of Japan officials believe there is almost no cost to waiting before raising rates.
Charu Chanana, chief investment strategist at Saxo Markets, said, 'Ueda's statement about maintaining maximum flexibility in January is not completely surprising. However, it is surprising that he seems indifferent to the ongoing wage-price spiral. This seems to be a counter to expectations for a rate hike in January.'
Institutions point out, 'Currently, the fate of the yen is no longer under the control of the Bank of Japan. Unless policymakers send bolder signals indicating that normalization of policy will resume, the currency will face more weakness and extreme volatility in 2024, and there is even a possibility it could fall to decades-low levels of 160.'
Traders should note that the Bank of Japan stated that the impact of exchange rates on prices may be greater than before. Committee member Naoki Tamura voted against the decision to hold steady, suggesting raising rates to 0.5% at this meeting.
If the Bank of Japan decides to keep rates unchanged until March or later, forex strategists have pointed out that the yen may face further weakness in the future.
Article reposted from: Jin Shi Data