Japanese Yen: BoJ seen close to September rate hike – Commerzbank

Commerzbank’s Volkmar Baur says accelerating inflation in Tokyo has strengthened the case for a Bank of Japan (BoJ) rate hike in September. Markets are pricing an implied probability of around 84% for a move, while the BoJ has yet to give clear guidance on timing. Baur argues that a delay would likely put significant pressure on the Japanese Yen (JPY).

Rising inflation builds case for BoJ move

"Nothing stands in the Bank of Japan’s way anymore. In August, inflation in the Greater Tokyo area stood at 1.9%; excluding energy and fresh food, it was even 2.0%. Annualizing the past three months reveals an acceleration in inflation, and service sector inflation, at 0.39% in August, was at its highest level in nearly a year and has also shown accelerating momentum over the past three months."

"Inflation has thus not only reached its 2% target but also threatens to rise above it in the coming months. The context of this rising inflation remains an environment of high energy prices, expansionary fiscal policy, and a policy rate that is, at best, at the lower end of what the central bank itself would describe as its neutral rate. It’s actually a pretty clear-cut case: the policy rate should rise."

"The market sees it similarly. The implied probability of an interest rate hike in September has recently risen again and now stands at around 84%. Only the Bank of Japan has yet to make any clear statements regarding the timing of its next move. And Deputy Governor Himino, too, preferred in his speech yesterday not to get specific just yet."

"A bit of uncertainty therefore remains. However, the signs clearly point to an interest rate hike in September. Anything else would likely put the JPY under significant pressure."