USD/JPY initially rose back above the 148.00 level just after the release of the US CPI report but has since fallen back towards 147.50. Economists at MUFG Bank analyze Yen’s outlook.

Stronger wage agreements to encourage gradual policy normalization

We continue to expect positive wage negotiation results this week to give the green light for the BoJ to begin to tighten policy next week. 

To dampen the market impact from exiting negative rates and yield curve control, the BoJ will be keen to emphasize that it will be a gradual process of policy normalization unlike the aggressive rate hike cycles implemented by other major central banks in recent years.

If the BoJ delivers cautious forward guidance alongside hiking rates that casts doubt on the need for further hikes, it could result in the Yen weakening further in the near term by encouraging the use of Yen-funded carry trades.