HSBC Projects Continued Yen Weakness as Bank of Japan Likely to Wait for Federal Reserve Before Another Hike
Source: ForexLive, Original reporting by Justin Low
URL: https://www.tradingview.com/news/forexlive:085fc463b094b:0-hsbc-expects-further-jpy-weakness-boj-may-wait-for-fed-before-next-hike/
HSBC analysts have issued a fresh outlook on the Japanese yen (JPY), warning of potential further depreciation as the Bank of Japan (BOJ) maintains a cautious policy stance. While the yen has already undergone significant weakening in recent months, particularly against the US dollar (USD), HSBC believes pressure may persist due to expected policy divergence between the BOJ and the US Federal Reserve (Fed).
In this comprehensive analysis, we delve deeper into HSBC’s view, the current macroeconomic environment in Japan and the US, and what this means for foreign exchange markets in the near to medium term.
Current Yen Overview
The Japanese yen has depreciated notably against the USD in 2023 and 2024, continuing a multi-year downtrend sparked by the differing monetary paths of the BOJ and the Fed. While the Fed embarked on an aggressive interest rate tightening cycle to combat US inflation, the BOJ has maintained ultra-easy monetary policy despite inflation in Japan climbing above its long-standing 2% target.
This divergence has dealt a blow to the yen by driving capital flows toward higher-yielding US assets, a trend that HSBC believes is unlikely to reverse any time soon.
HSBC’s Key Observations
According to HSBC, there are several major reasons why the JPY could weaken further in the months ahead:
– The Bank of Japan is not signaling imminent rate hikes.
– The central bank appears likely to wait for further clarity from the Federal Reserve before making its next policy move.
– The currency may remain under downward pressure in the near term due to interest rate differentials.
– Even if the BOJ eventually tightens policy slightly, HSBC believes it won’t be on a scale significant enough to reverse JPY weakness meaningfully.
BOJ’s Cautious Approach
The BOJ, under Governor Kazuo Ueda, took its first tentative step away from years of ultra-loose policy in March 2024 by ending its negative interest rate regime and tweaking its yield curve control framework. However, the rate increase was extremely modest, and real interest rates in Japan remain deeply negative.
HSBC analysts emphasize that despite this policy shift, the BOJ has not committed to a concrete path of continued rate hikes. This cautious, data-driven approach reflects the Bank’s concerns about the fragility of Japan’s economic recovery and its desire to avoid prematurely tightening financial conditions.
BOJ Likely to Wait for the Federal Reserve
Another crucial component of HSBC’s outlook is the relationship between the BOJ and the Federal Reserve. According to HSBC, BOJ policymakers may be waiting to see what the Fed does before taking further action on interest rates.
Key reasons for this strategic wait include:
– The Fed’s decisions significantly impact global bond yields and currency markets.
– Fed rate cuts or a signal of policy easing could reduce interest rate differentials between Japan and the US, offering some relief to the yen.
– If the Fed maintains high rates through 2024, the BOJ may have little incentive to move aggressively with rate hikes of its own.
This “wait-and-see” approach aligns with the BOJ’s historical preference for gradualism. The Bank likely recognizes that any aggressive tightening in Japan, in an environment where the Fed remains hawkish, would have limited effectiveness in boosting the yen.
Global Context: Fed Outlook and Market Pricing
As of early June 2024, market pricing continues to reflect expectations that the Fed will start cutting rates in the second half of the year. However, Fed officials have reiterated that they are not in a rush, and the future path remains data-dependent, particularly on inflation.
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