The Japanese yen continues to gradually lose ground against the US dollar, even in light of the differing monetary policies anticipated from central banks in the near future. This indicates that the expected interest rate hike from the Bank of Japan is already factored into the yen's value, and much will depend on new forecasts. However, it is becoming increasingly clear that the long battle against deflation in the country, which has persisted for decades, is nearly over.
Today, Bank of Japan Governor Kazuo Ueda stated that the central bank is approaching its inflation target, reinforcing signals that the Bank of Japan may raise interest rates at its monetary policy meeting next week. Ueda mentioned in an interview that they are getting closer to achieving stable inflation of 2%.
Ueda's comments came amidst increased expectations that the Bank of Japan will raise borrowing rates to 0.75%, the highest level since 1995. There are concerns that such a rate hike could negatively impact Japan's economic growth, especially given its aging population and declining productivity. Ueda acknowledged these risks but emphasized that maintaining price stability is a top priority. It is expected that the Bank of Japan will act cautiously and gradually to avoid destabilizing the economy.
In his interview, Ueda suggested that the bank is unlikely to stay at its current level, as it continues to adjust its support for the economy. Ueda stated that the bank would continue to gradually adjust its monetary policy as they work towards achieving stable inflation of 2% and returning the policy rate to its natural level, regardless of where that may be.
Currently, traders are assessing the likelihood of a rate hike at the upcoming meeting to be approximately 88%, based on overnight swaps. The key focus will be on how Ueda defines the future trajectory of interest rates and his views on the neutral rate at which borrowing costs neither stimulate nor restrain the economy.
Ueda also reiterated the Bank of Japan's position that it is closely monitoring the impact of exchange rates on inflation. Last month, the yen hit 157.89 against the dollar, its lowest level since January, raising concerns about additional inflationary pressures. Ueda remarked that they strive to avoid making direct comments on fiscal policy, as that responsibility lies with the government.
Regarding the current technical picture for USD/JPY, buyers need to reclaim the nearest resistance at 156.20. Achieving this will allow them to target 156.60, above which a breakthrough may prove challenging. The ultimate goal will be around 157.05. In the event of a decline, bears will attempt to gain control at the 156.00 level. If successful, a breakdown of this range could deal a serious blow to bullish positions and push USD/JPY down to a low of 155.70, with the potential for a move towards 155.40.
