Yen: BOJ Rate Check Limits Yen Downside - MUFG

The yen experienced significant volatility following the Bank of Japan's latest policy update, with USD/JPY briefly breaking above 158.00 before retreating notably, currently trading around 157.28.

**BOJ Policy Update Triggers Yen's Initial Decline Then Stabilization**

According to MUFG analyst Lee Hardman, the yen weakened sharply in the initial phase following the BOJ's policy statement, with USD/JPY briefly touching above 158.00 before pulling back to around 157.00. Hardman noted that the BOJ's rate check mechanism constrains the yen's downside, serving as one of the key factors behind this pullback.

**Clear Divergence in Market Expectations on Rate Hike Pace**

Meanwhile, market expectations regarding the BOJ's policy intensity show clear divergence. Masayuki Koguchi, Executive Chief Fund Manager at Mitsubishi UFJ Asset Management, previously stated that a mere 25 basis point rate hike would be insufficient to stem the yen's depreciation, noting that if inflation accelerates, the BOJ could hike by 50 to 75 basis points in a single meeting, with the possibility of non-cyclical hikes also not being ruled out. This stance indicates that some market participants believe a moderate rate hike path would have limited practical effect in boosting the yen's exchange rate.

**US-Japan Rate Differential and Policy Paths Remain Key Variables**

Analysts point out that the trajectory of the US-Japan rate differential and the degree of divergence in the two central banks' policy paths remain core variables influencing the yen's medium-term trend. While the BOJ's rate check mechanism provides support for the yen in the short term, if the broader dollar strength persists, the yen's rebound room may remain limited. Investors need to continuously monitor whether USD/JPY shows directional breakthroughs at key levels, as well as movements in Japanese long-end government bond yields.