Image Source: What began as a calculated strategy to short the Euro through EURJPY, leveraging the yen’s safe-haven appeal and the potential upside of a December BoJ rate hike, has morphed into broader anticipation of an odds-on rate hike trajectory. This sentiment has been simmering throughout the month, but the real catalyst came with Tokyo’s November CPI announcement. Surprisingly, inflation jumped to 2.6% year-on-year, surpassing the expected 2.2% and the previous rate of 1.8%. This hotter-than-anticipated inflation report spurred a rapid yen appreciation, which soared from 151.34 to just below 149.84 against the dollar.This robust inflation figure supports growing market expectations that the BoJ may opt to raise rates at its December 19th meeting. Overnight swaps now show a 64% probability of a hike. BoJ Governor Kazuo Ueda’s repeated statements that borrowing costs will rise if the economy meets the bank’s forecasts have fueled these speculations all month.Beyond fading energy subsidies, additional inflationary pressures are in the pipeline. A report from Teikoku Databank indicates that food companies plan to increase prices for 3,933 products in 2025—2.5 times the number planned for this year. This significant planned increase in food prices could further amplify inflationary pressures, potentially influencing upcoming BoJ policy decisions and contributing to a more pronounced yen appreciation, especially as the market anticipates a potential US rate cut in December.
There is potential to price in maximal policy divergence between the Fed and the BoJ at the upcoming meeting; hence, USDJPY sub147, but this will largely hinge on next week’s Non-Farm Payrolls (NFP) and the following week’s US CPI data. Friday’s Tokyo CPI data represents the final government inflation report before the BoJ’s decision on its benchmark rate on December 19th. Therefore, any further adjustments to the yen swap curve valuation will likely be influenced by upcoming BoJ commentary, shaping market expectations and monetary policy trajectory ahead of their pivotal meeting.On the downside, the yen’s appreciation has cast a shadow over Japanese equities, notably impacting the Nikkei 225 index, which has declined. This downturn is attributed mainly to concerns about how a stronger yen might affect export-oriented companies, making their products more expensive abroad and potentially dampening overseas sales.More By This Author:
