Bank of Japan could raise rates as early as April

[Ben Graham]

The Japanese yen strengthened notably against the US dollar after active market speculation that the Bank of Japan could raise its policy rate as early as April. Those expectations, former BOJ board member Seiji Adachi said, rest on the likelihood that the bank will use a fresh set of economic data due in April as a catalyst to reassess its ultra-easy monetary stance. Adachi added that the central bank might ignore market rumors of a March hike and instead wait for a fuller picture of economic conditions.

The prospect of a move in April has spurred demand for the yen because higher interest rates typically make a currency more attractive to investors. Rising borrowing costs tend to draw capital inflows and support a currency's value. After a prolonged period of uncertainty, any shift in the BOJ policy would be significant. A potential rate increase in April would signal growing central bank confidence in the durability of Japan's economic recovery and a risk of further upside to inflation.

Adachi said that hiking in March would carry risks because it would be based on expectations rather than confirmation, and that officials would not have the data needed to confirm an improvement in core inflation until April.

Adachi's view aligns with rising market expectations that Governor Kazuo Ueda's policy council could act this spring—sooner than most economists anticipated following the last rate move in December.

Some observers have warned that Prime Minister Sanae Takaichi could complicate BOJ normalization, particularly after her convincing election victory last week. Adachi said, however, that she is unlikely to block a rate increase because such interference could prove counterproductive.

Adachi said that Takaichi appeared to have become very sensitive to market moves and that, if she were to tell the Bank of Japan not to raise rates, the likely market reaction would be yen depreciation.

A key consideration for the BOJ will be the outcome of this year's annual wage negotiations. Because pay deals with major firms are not expected to be concluded until March 23, the policy council may regard its March meeting, which concludes on March 19, as too early to decide, Adachi said.

As for a technical outlook for USD/JPY, buyers should aim to reclaim the nearest resistance at 153.30. That would allow a test of 153.70, above which a breakout would be challenging. The extended target is around 154.20. On a decline, bears will try to seize control at 152.85. If they succeed, a break of that range would deal a serious blow to bullish positions and could push USD/JPY down to 152.47 with scope to extend to 152.10.

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