Traders prepare for hawkish Bank of Japan as yen hits four-decade low
Societe Generale, Natixis and Barclays see rising pressure on the Bank of Japan to accelerate rate hikes as the weak yen and higher energy costs fuel inflation.
A growing number of banks are advising traders to prepare for a more hawkish Bank of Japan after the yen fell to its weakest level in nearly four decades.
Societe Generale, Natixis and Barclays said the currency’s decline could push BOJ officials to accelerate interest rate increases as higher import and energy costs feed into domestic inflation.
The yen fell as low as 163.99 per dollar on Friday, its weakest level since November 1986. The currency recorded its largest weekly decline in more than two months as rising oil prices, concerns over Japan’s fiscal outlook and a widening yield gap with the US increased pressure on the currency.
Societe Generale strategists Stephen Spratt and Reo Sakida said higher energy prices and faster transmission of import costs to consumers are becoming increasingly concerning for BOJ officials. The bank recommended selling five year Japanese government bonds against the 30 year maturity, a trade that would benefit if shorter term yields rise faster.
Natixis strategist Dayeon Hong said the yen’s fall beyond 163 increases the possibility that the BOJ will adopt a significantly more hawkish tone at its July 31 meeting. She recommended a two year yen interest rate payer swap that would gain if expectations for near term borrowing costs rise.
The BOJ is widely expected to leave rates unchanged at the meeting after lifting its benchmark rate from 0.75% to 1% in June, the highest level since 1995. The central bank has signaled that further increases remain possible as underlying inflation approaches its 2% target.
Barclays economists expect the next increase in October, followed by another in April. They said Governor Kazuo Ueda is likely to use hawkish language to restrain further yen weakness and preserve flexibility before the bank’s next rate move.
Pressure is also building in Japan’s bond market. The yield on the 40 year government bond moved above 4% earlier this month as investors demanded greater compensation for inflation and fiscal risks.
The yen’s continued slide has also renewed speculation that Japanese authorities could intervene directly in currency markets. However, analysts have warned that intervention may provide only temporary support without faster monetary tightening from the BOJ.