JPY flows: JPY mildly supported by Ueda press conference

The BoJ left rates unchanged as expected at the meeting overnight, and Europe enters the market with BoJ governor Ueda’s press conference on the wires. Thus far, there hasn’t been a lot of market reaction, but UD/JP has slipped back slightly after breaching 150 briefly at the starts of the press conference. The Japanese yield curve hasn’t moved significantly in response to the BoJ decision or Ueda’s comments, with around 30bps of tightening still priced in by year end and 5 bps for the May meeting.

If anything, we would see his comments as mildly hawkish thus far, suggesting a May hike is rather more likely than the market is pricing in. He has noted that short and medium term (real) yields are still in negative territory, and has said again that if things turn out as the BoJ forecast, they will be raising rates. While he notes a lot of uncertainty related to US tariffs, he indicates that wage awards are strong and at or above the expected levels, and that some on the BoJ had said that they needed to pay attention to price overshoot risks today.  Against this, he also said the risk from falling behind the curve in monetary policy was not high, and that he wouldn’t raise rates when the economy was in bad shape, but he was optimistic about Q1 GDP. He noted that the impact of US tariffs will start to be felt in early April. and wage data was key to the next decision. This suggests that with the spring wage round underway, there should be a lot of key information available by the time of the next meeting in May.

USD/JPY is not much changed from yesterday’s levels, but we still see downside risks dominating. If US tariffs are damaging, rates will not be raised soon, but in that case the impact from tariffs will likely be global and will negatively impact risk sentiment, which will tend to benefit the JPY. The JPY may struggle more to make gains if risk appetite is strong, but in that case there is a higher probability of an early BoJ rate hike. So we see little JPY downside risk and 150 and 164 should be toppish in USD/JPY and EUR/JPY respectively.