Synopsis:

CIBC anticipates a steady but moderate depreciation of the USD/JPY exchange rate as a result of the divergence in monetary policy between the Federal Reserve and the Bank of Japan.

Key Points:

• The FX market may be overreacting to the immediate implications of the LDP leadership on BoJ policy.
• The BoJ is likely to refrain from rate hikes during periods of market instability, as noted by Deputy Governor Uchida.
• Japanese economic confidence is closely tied to domestic equity sentiment; further declines in the Nikkei could dampen expectations for an October BoJ hike.
• While a December hike is possible, March 2025 is viewed as more likely for any significant policy change.
• CIBC expects the yen to strengthen to 137 by the end of Q4.
• Rapid USD/JPY declines could negatively affect Nikkei levels and Japan’s consumption outlook, highlighting the interconnectedness of US and Japanese monetary policies.

Conclusion:

The outlook suggests that while divergence in central bank policies will shape market narratives, there are inherent risks from US monetary policy that could influence Japan's economic landscape.