Tokyo’s core inflation falling below the Bank of Japan’s 2% target in October has raised fresh uncertainty around the BOJ’s approach to rate hikes. The decline in inflation pressures, particularly in the services sector, highlights a slower-than-expected spread of rising labor costs, which challenges the BOJ’s outlook. With the yen facing pressure from the US -Japan interest rate gap, analysts anticipate that the BOJ may tread carefully in its upcoming policy discussions, potentially delaying additional rate hikes until early next year.
Tokyo Inflation Dip Casts Doubt on BOJ’s Next Rate Move
In October, core inflation in Tokyo slipped below the Bank of Japan’s 2% target for the first time in five months, raising questions about the BOJ’s plans for further rate hikes. Services inflation also decelerated, suggesting that rising labor costs aren’t spreading across the sector as anticipated. Tokyo’s core consumer price index rose 1.8% year-over-year, slightly above forecasts but down from September’s 2% increase. Economists expect the BOJ to discuss another rate hike by December, though many believe a hike may wait until early next year, given the current inflation trajectory.
BOJ Navigates Cautious Path Amid Global Economic Shifts and Yen Pressure
The Bank of Japan (BOJ) is expected to maintain its ultra-low interest rate of 0.25% at its Oct. 30-31 meeting. While no significant adjustments to growth or inflation forecasts are anticipated, the BOJ may indicate progress on wage growth and potentially hint at a less dovish stance. With recent yen declines posing risks, Governor Ueda aims to signal a cautious yet adaptable approach to future rate hikes. The BOJ is balancing the need to avoid market disruptions with the risk of encouraging yen-selling by appearing too dovish, a stance the IMF supports for gradual adjustments.
BOJ’s Ueda Signals Patience on Rate Hikes Amid US Economic Optimism
BOJ Governor Kazuo Ueda indicated that the Bank of Japan has sufficient time to decide on any further interest rate hikes, emphasizing a cautious approach. Speaking after a G20 meeting in Washington, Ueda noted that optimism about the US economy is growing, supported by recent strong data that eased concerns over a downturn. However, he stressed the importance of assessing whether this economic strength is sustainable or merely short-term. The BOJ will convene for a two-day policy meeting next week to discuss these developments.
BOJ Cautions on Slow Rate Hikes Amid Yen Weakness and Speculation Risks
Speaking in Washington, Bank of Japan Governor Kazuo Ueda, highlighted the challenge of timing rate increases amid global uncertainties, particularly with inflation targets still out of reach. He emphasized the importance of a balanced approach to rate hikes, warning that raising rates too slowly could fuel speculative positions in the yen. Ueda noted that the yen’s ongoing weakness, driven by the interest rate gap with the US, adds pressure to Japan’s import costs. Finance Minister Katsunobu Kato echoed concerns, observing rapid, one-sided moves in the yen’s value and stressing close monitoring of currency trends.
Fed Leaders Signal Rate Cuts Ahead but Disagree on Speed
Four Federal Reserve policymakers recently voiced support for further interest rate cuts but varied in their preferred approach. Some advocated for gradual reductions to manage economic risks and avoid volatility, while others highlighted the importance of not restricting the labor market further. The sentiment reflects a cautious stance, with openness to adjusting the pace of cuts if labor conditions show signs of weakening. This divergence hints at a complex discussion ahead of the Fed’s policy meeting on Nov. 6-7.
Technical Analysis: USDJPY Rally Gains Momentum, Key Targets Ahead Despite Divergence Signal
Following the recent low of 139.568 on September 16, USDJPY has rebounded significantly, underpinned by technical patterns that signal ongoing bullish momentum. The initial reversal emerged with a Hammer candlestick, subsequently followed by a “failure swing” pattern where the trough at 141.632 held above the previous low, and the price broke decisively past 146.482, setting the stage for further gains. The uptrend is reinforced by a “Golden Cross” crossover, as the shorter-term moving average (MA) has crossed above the longer-term MA with both averages trending upward. This move is bolstered by momentum indicators, with the Momentum oscillator consistently above 100 and the RSI remaining above the 50 mark, confirming bullish sentiment.
However, a potential pause or correction may be on the horizon, as a negative divergence between the price action and the Momentum oscillator suggests a weakening in upward momentum.
If the upward momentum persists, traders may focus their attention on the following price targets: 154.329, 162.177, and 160.160.
Conclusion
In conclusion, the Bank of Japan’s approach to rate adjustments remains delicately poised as it navigates a challenging environment marked by subdued inflation, yen volatility, and external economic pressures. The October dip in Tokyo’s core inflation below the BOJ’s target underlines the central bank’s balancing act between maintaining stable growth and avoiding speculative risks tied to low rates. Upcoming policy decisions will likely reflect a careful consideration of both domestic economic indicators and global trends, with any move toward rate hikes expected to proceed cautiously. As a result, analysts anticipate the BOJ will likely delay significant policy shifts until early next year, ensuring alignment with inflation and economic targets.