The US dollar is maintaining its dominant position against the Japanese yen. Previously, many economists and investors were expecting possible changes in the Bank of Japan's monetary policy in the near future, but they had to moderate those expectations in light of today's speech by Seiji Adachi, a board member of the Bank of Japan. Adachi emphasized the need for a gradual approach to raising the key interest rate, which cemented the market's belief that the authorities won't make policy changes at their upcoming meeting this month.
"In the process of gradually raising rates, we need to be cautious, as we must increase them very carefully, while maintaining favorable financial conditions until the annual inflation rate reaches 2%," Adachi said in his speech to local business leaders in Kagawa, on Shikoku Island, Japan.
Adachi, a relatively dovish policymaker on the Bank of Japan's board, spoke two weeks before authorities gather to discuss monetary policy on October 31. While most economists expect the central bank to leave interest rates unchanged, some have pushed their forecasts for the next rate hike even to January of next year.
Adachi's emphasis on a gradual pace of policy tightening may strengthen market expectations that there will be no more rate hikes this year, which is favorable for the US dollar but negative for the Japanese yen, which has weakened a lot in recent months.
This Friday, key inflation data will be released. Consumer inflation is expected to have slowed to 2.3% in September, the lowest rate since April. According to Adachi, while economic data supports the need for policy normalization, there is also a risk that excessively rapid rate hikes could push the economy back into deflation.
As I noted earlier, the Japanese yen has lost ground in recent weeks as the prospects for closing the interest rate gap between the US and Japan have dimmed somewhat. Many policymakers have repeatedly warned about the risk of a strong yen, which could hinder the Bank of Japan's efforts to achieve sustainable inflation, especially after the Federal Reserve began its easing cycle last month. "There is a possibility that a correction of the weak yen could gather momentum," Adachi said. "This could put downward pressure on inflation, particularly in the retail sales sector."
Adachi also pointed out that it is currently difficult to determine exactly where the neutral rate for Japan should be, allowing the bank to raise rates further while still aiming to keep financial conditions broadly accommodative.
As for the current technical picture of USD/JPY, dollar buyers need to push through the nearest resistance at 149.60. Only this would allow traders to hit a target of 150.10. Breaking above this level will be quite challenging. The furthest target is the 150.55 area. Once it is hit, we could see a sharper upward move in USD/JPY toward 151.15. In the case of a decline in the price, the bears will try to take control of 148.90. If successful, a break of this range would deal a significant blow to the bulls' positions and push USD/JPY down to a low of 148.50, with the potential to reach 148.20.
