FX Daily Overview – MUFG Research

Yen Weakens Amid Dovish Fed Comments

The yen has continued its decline during Asian trading, accompanied by a drop in the US dollar. This shift comes after dovish remarks from New York Fed President William Williams, who hinted at potential interest rate cuts in December. Recent weak U.S. economic data, especially with Thanksgiving approaching, has reinforced market expectations for a Fed rate cut. The core PCE inflation is now reported to be below the Fed’s projected year-end target, giving dovish members of the FOMC more reason to advocate for another rate reduction in December. Consequently, US interest rate markets are more fully pricing in this cut. Currently, a 20 basis point decrease is reflected in the markets, but only about 9 basis points are expected for November 20th. There could be a temporary pause in the Fed’s rate-cutting stance around January and March next year. If the Fed goes ahead with the anticipated cuts in December, we may see some opposition from FOMC members and a slowdown in rate decreases early next year, possibly leading to a hawkish cut.

Earlier in the week, the yen continued to decline alongside the dollar. A significant development yesterday was a report stating that the Japanese government plans to issue an additional 11.7 trillion yen in bonds to fund a supplementary budget totaling 18.3 trillion yen, as documented by Bloomberg. The supplementary budget will also be supported by reducing borrowing through 2.9 trillion yen in surplus tax revenue, roughly 1 trillion yen in non-tax revenue, and about 2.7 trillion yen in unused funds from the previous fiscal year. This issuance aligns with Prime Minister Takaichi’s commitment to keep the total amount of government bonds issued this fiscal year at 40.3 trillion yen, which is less than last year’s total of 42.1 trillion yen. After reaching a year-to-date high on the 20th, government bond yields have stabilized at elevated levels since the supplementary budget announcement. While the details of this budget have lessened some fiscal concerns in Japan, the yen could still face further depreciation in the short term.

If the yen continues its downward trend as the year closes, the Bank of Japan might consider resuming interest rate hikes in December. Recent insights from our Tokyo team suggest that expectations for the next BOJ rate hike have shifted from January to December, which could be crucial for bringing the USD/JPY back to the 150.00 mark by year-end. This sentiment appears to be gaining traction among market players. At present, Japanese interest rate markets are factoring in about 13 basis points of rate increases by December, up from just 5 basis points a week ago. This more hawkish outlook for BOJ rate hikes has been influenced by recent comments from BOJ officials, including Governor Ueda, who stated they are closely monitoring the effects of a weaker yen on inflation. Nevertheless, expectations for an imminent rate hike were somewhat dampened overnight by dovish BOJ member Akira Noguchi, who advocated a cautious and gradual approach to policy adjustments. His comments were notably less hawkish than those made in September, where there was a stronger emphasis on the need for adjustments in interest rates.