Synopsis:

Nomura highlights that the upcoming Bank of Japan (BoJ) December meeting is shaping up to be a significant one, with Governor Ueda signaling the possibility of a rate hike. Key data releases and the impact of JPY depreciation on inflation and the economy will be crucial factors ahead of the meeting.

Key Points:

• Governor Ueda's Comments:

  • BoJ Governor Ueda has emphasized the importance of upcoming economic data and events leading to December's meeting, suggesting it will be a "live" decision point.
  • He noted that JPY depreciation tends to increase the need for rate hikes, linking FX movements directly to monetary policy considerations.

• FX Impact:

  • The BoJ is closely monitoring the effect of the weaker yen on inflation and the broader economy.
  • This stance limits the potential for significant upside in USD/JPY and other yen-crosses, with the likelihood of intervention or policy adjustments growing if the yen continues to weaken.

• Investor Behavior:

  • Japanese investors resumed foreign equity purchases last week, though at a measured pace, and were net sellers of foreign bonds.
  • Concerns about rising US yields under "Trumponomics" have tempered demand for foreign fixed income.

• Policy Implications:

  • A rate hike in December appears increasingly likely, barring a sharp appreciation of the JPY or a significant drop in equity markets.
  • This potential move is expected to provide support to the yen and limit further USD/JPY gains.

Conclusion:

Nomura expects the BoJ to move toward a rate hike at its December meeting, given the growing importance of FX dynamics and economic data. This scenario reinforces the view of limited upside potential for USD/JPY and other yen-crosses in the near term.