Yen Strengthens Against Dollar Ahead of BOJ Rate Hike

Korea Economic Daily

Summary

Due to expectations of a Bank of Japan policy rate increase, the yen has continued to strengthen against the dollar and the euro.
Along with yen strength, the rise in the Tankan index and the U.S. nonfarm payroll report and other key indicators are affecting exchange rates and investor sentiment.
Concerns remain over further BOJ rate hikes and the adjustment of the pace of tightening, so investors should pay attention to yen exchange rate volatility.

Continued strength against the dollar and the euro

BOJ expected to raise its policy rate from the current 0.5% to 0.75%

With markets expecting a Bank of Japan policy rate increase, the yen has been gaining against major currencies day after day.

On the 16th (local time), the Japanese yen rose as much as 0.4% against the dollar to ¥154.68. It also strengthened against the euro, rising 0.3% to ¥182.06 per euro.

The previous day, the Bank of Japan-released Tankan index for the fourth quarter rose to its highest level in four years, heightening expectations of a BOJ rate increase this week. The high Tankan index, which shows corporate confidence, suggests that Japanese companies are expected to give wage increases next year at levels similar to this year.

Traders are also closely watching U.S. economic data that could affect the Fed's rate outlook. The U.S. November nonfarm payrolls report to be released that day is expected to show weakness in the labor market.

Teppei Ino, head of global market research at MUFG Bank in Tokyo, said, "If the numbers in the U.S. nonfarm payrolls report come in weak, dollar selling could emerge and the dollar-yen rate could fall below 154."

The BOJ is expected to raise the policy rate at its meeting on the 19th from the current 0.5% to 0.75%, the highest level in 30 years. New Prime Minister Sanae Takaichi has criticized rate hikes as a foolish idea, but she is currently facing falling approval ratings for the ruling party due to rising living costs. Accordingly, she has been restraining criticism of the BOJ's monetary easing (rate-cut) policy while focusing on curbing inflation.

Ryutaro Gono, BNP Paribas's chief Japan economist, said, "Considering that Prime Minister Takaichi's government prefers a low-rate stance, the pace of rate increases will likely be about once every six months." Nevertheless, he said, "There is also a significant risk that the BOJ may need to speed up the pace of tightening depending on exchange rate movements." In other words, even after rate increases, if yen weakness persists and import price pressures rise, the pace of rate cuts could be faster.

Guest reporter Kim Jeong-a kja@hankyung.com