Japan’s currency dropped as much as 0.5% to 158.21 against the dollar and was the worst performer among its Group-of-10 peers.
“While there were many hawkish opinions, they were not hawkish enough to strengthen expectations for a consecutive rate hike,” said Takuya Kanda, senior FX analyst at Gaitame.com Research Institute. “If dollar-yen rises above 158, intervention concerns are likely to cap the dollar’s upside.”
The BOJ affirmed that its policy focus has shifted to preventing inflation from overshooting its target, in the summary from its last meeting when authorities raised the policy rate to the highest since 1995. Among other comments, members noted that the neutral rate could deviate above the estimate, many firms see only limited impact of hikes taken so far and it’s desirable to bring the benchmark rate higher at an early stage.
Swaps market pricing for a rate hike by Oct. 30 slipped to just under 20% this morning from more than 30% at one point yesterday. A move is fully priced in by the December gathering.
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Meanwhile, yields on Japanese government bonds rose, notably on longer tenors, suggesting market concern that the central bank may not be moving fast enough to contain inflation.
Financial authorities reportedly conducted a rate check during New York trading hours after the September meeting as the yen weakened on disappointment that the BOJ didn’t offer stronger guidance on the pace of future interest rate hikes. Japan stayed out of foreign exchange markets in the latest monthly period covering most of September, finance ministry figures released Wednesday showed.
In the US, Federal Reserve policymakers voted unanimously to raise interest rates last month and signalled support for an additional hike this year and one next year.
“There is a high bar for the BOJ to meet in terms of hawkishness,” said Samara Hammoud, a strategist at Commonwealth Bank of Australia. “The BOJ’s recent split decision and a more hawkish Fed mean that BOJ rate hike expectations are unlikely to offer much support to the yen unless the BOJ provides more explicit forward guidance.”
The BOJ’s quarterly Tankan business survey also showed on Thursday that confidence among Japan’s large manufacturers rose to the highest level in more than eight years.
It also showed “little sign of intensifying inflation pressure,” according to Taro Kimura, senior Japan economist at Bloomberg Economics. “The Tankan results lower the probability of a back-to-back increase in October,” he said.