On Thursday, the USD/JPY currency pair hit an 8-month price high, firmly establishing itself within the 154 range. The yen reacted negatively to the outcomes of the Bank of Japan's October meeting, despite the central bank implementing the basic, most-expected scenario of maintaining all monetary policy parameters unchanged. However, the formal conclusions did not capture anyone's interest—the focus of traders was on the rhetoric of the BOJ Governor Kazuo Ueda, who disappointed with his "silence."
But why did the Japanese currency react so emotionally to the results of the October meeting? In my opinion, the "Takahichi factor" and last week's CPI growth report, which reflected accelerating inflation in Japan, played a significant role. The release heightened "hawkish" expectations that ultimately proved unfounded.
To recall, the overall consumer price index accelerated in September to 2.9% year-on-year, after four consecutive months of decline to 2.7%. A similar trend was observed in the consumer price index excluding fresh food prices, which rose to 2.9% year-on-year after falling to 2.7%. Finally, the consumer price index excluding fresh food and energy rose by 3.0% year-on-year.
The rise in overall inflation is primarily due to increased electricity prices (following the removal of subsidies), food prices (due to the yen's depreciation and rising import costs), and imported goods. The acceleration in core inflation is mainly linked to rising prices in the services sector—housing rentals, utilities, medical and educational services, and childcare.
After the inflation report was published, the market speculated that the BoJ would take a "moderately hawkish" position, that is, maintain the status quo while hinting at a rate hike at one of the upcoming meetings. Firstly, because inflation remains persistently above the BoJ's target level. Secondly, wage indicators are rising. Thirdly, Core-Core CPI signals sustained domestic pressure (not just external shocks). Lastly, inflation expectations are rising as companies continue to factor in further price increases.
In other words, most market participants hoped to hear hawkish tones from the BoJ representatives, "agreeing" that the interest rate would remain unchanged. However, the central bank not only maintained the status quo but also issued rather vague forecasts, retaining uncertainty about the timing of the next rate hike.
In the accompanying statement, the Bank of Japan mentioned that it stands ready to continue raising borrowing costs "if the economy develops in accordance with forecasts." The specific conditions for the next normalization step remain unknown. The central bank did not specify any timeframes or macroeconomic guidelines.
During the final press conference, BoJ Governor Kazuo Ueda also evaded specifics. He stated that the central bank needs to "wait a little" to assess the impact of US tariffs on the Japanese economy.
The market interpreted the central bank's cautious phrasing unfavorably for the yen, assuming it would maintain a wait-and-see stance in the foreseeable future (i.e., for at least the next two meetings).
From my perspective, the yen's emotional reaction is also influenced by the "Takahichi factor." This is the first meeting of the central bank following the appointment of the new Prime Minister of Japan, who has long and consistently opposed raising interest rates. According to her, tightening monetary policy "undermines the fragile recovery of the country's economy." At the same time, Sanae Takahichi advocates tax cuts and economic stimulus through aggressive government spending, following in the footsteps of former Prime Minister Abe's economic policy.
Immediately after her victory in the party elections, Takahichi stated that "the government must take responsibility for monetary policy," and the central bank should consider "the best means to achieve its goals."
Formally, the BoJ is an independent body. However, it is clear that the Prime Minister can exert political influence (pressure) on the central bank. Based on USD/JPY's reaction, the market has concluded that Takahichi is already influencing the bank's policy. This raises significant questions about the central bank's next steps toward normalizing monetary policy. In this context, the outcomes of the BoJ's October meeting are indicative.
Further support for USD/JPY buyers came from Donald Trump, who expressed optimism about the outcome of his meeting with Chinese leader Xi Jinping. Against the background of easing geopolitical tensions, interest in risk increased, leading to a decline in demand for "safe haven" currencies, including the yen. This factor further supported USD/JPY buyers.
From a technical perspective, the pair is situated on the daily chart between the middle and upper lines of the Bollinger Bands and above all the Ichimoku indicator lines, which have formed a bullish "Parade of Lines" signal. On H4 and W1 timeframes, the price is at the upper Bollinger Bands line and above all Ichimoku lines, indicating ongoing growth potential.
Buyers were unable to impulsively break the 154.50 resistance level, which corresponds to the upper Bollinger Bands line on the daily chart. Nonetheless, bullish sentiment remains for the pair. Southern price retracements are advisable for opening long positions with targets of 154.50 and, if breached, 155.00.
