PoundSterlingLIVE - Above: File image of Kazuo Ueda, Governor at the Bank of Japan. © Sérgio Garcia/Your Image for ECB.
The Japanese Yen is on top after a 'hawkish' domestic inflation print and Bank of Japan decision. The Bank of Japan (BoJ) opted for the status quo and left its policy rate at 0.5%, while domestic core inflation stayed elevated above 3.0% in August.
Unexpectedly, two policy members voted to lift the policy rate to 0.75%, versus seven in favour of keeping rates unchanged, signalling that the Bank stands ready to raise interest rates again soon.
"The dissents will certainly help reinforce expectations that the BoJ could decide to lift the key rate at the next meeting in October," says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG Bank LTD.
"The yen has advanced primarily on the back of the two dissenting votes," he adds.
In the wake of the decision, Governor Ueda said the Bank will raise interest rates if its expectations for the outlook are realised.
Above: JPY performance on a one-day timeframe.
The Bank also said it would begin to unwind its holdings of Japanese stock ETFs and Real Estate Investment Trusts (REIT), which is interpreted as a show of confidence in the domestic economic outlook.
On this note, it was revealed the Bank of Japan's preferred measure of core-core inflation, which strips out volatile items such as fresh food and energy, held firm above 3.0% in August.
"Benchmark 2-year Japanese Government Bond yields rose to their highest level since 2008, rising two basis points to 0.91%. The Japanese yen strengthened across the board," says a strategy note from Saxo Bank.
Amidst JPY outperformance, GBP/JPY is down 0.40% on the day at 199.78, having been as high as 201 on Thursday. The EUR/JPY is down a quarter of a per cent at 173.97, and USD/JPY is flat at 147.
Although the yen may be the day's big winner, it still holds the title of the biggest loser when screened over a one-month timeline:
Above: JPY performance on a one-month timeframe.
Longer-term underperformance is linked to Japan's chronically low interest rates, which suppress short-term bond yields and make it cheaper to borrow in yen and buy foreign bonds that yield higher rates.
However, the gap looks set to close as the Bank of Japan looks to be on the cusp of a rate hiking cycle. Higher rates in Japan diminish the attractiveness of this 'carry' trade, and could help the Yen find growing support.
Following Friday's decision, money-market pricing indicates 13bp of hikes are priced for the October policy meeting, up from 8.5bp ahead of the decision, implying a slightly greater than 50% probability of a 25bp hike.
"That seems reasonable given the LDP leadership election on 4th October is an element of uncertainty that could derail a hike on 30th October," says Halpenny.
"Overall, we continue to expect the BoJ to restart its hiking cycle in late October," says Kelvin Lam, Senior China+ Economist at Pantheon Macroeconomics.
An original version of this article can be viewed at Pound Sterling Live