Global FX: Hawkish Fed & dovish BoJ force a Yen forecast rethink
The desk posits that the recent hawkish surprise from the Federal Reserve, coupled with a dovish shift from the Bank of Japan, necessitates a reevaluation of USD/JPY forecasts. Per the full note from J.P. Morgan, the Fed's stance has strengthened the dollar's outlook, while the BoJ's recent decisions have weakened the yen's position, leading to a potential shift in market dynamics. Current positioning suggests traders are recalibrating their expectations, particularly in light of the Fed's commitment to maintaining higher interest rates. This backdrop sets the stage for a more bullish view on USD/JPY, with the desk aligning closely with J.P. Morgan's forecast adjustments.
What the desk is arguing
J.P. Morgan's recent analysis indicates an adjustment in their USD/JPY forecasts, driven by a hawkish Fed and a dovish BoJ. The desk believes that the recent policies could see the yen weaker than previously anticipated, reinforcing their target of 164 by December 2026.
The contrast of the Fed's tightening approach against the BoJ's more cautious stance effectively supports a weaker yen. Other market participants may expect a return to a more stable environment, but J.P. Morgan is firmly positioning itself against this trend, anticipating more downward pressure on JPY as the wider economic dynamics unfold.
Where it sits in our coverage
Our consensus target for USD/JPY currently sits at 147.5, with a range between 150.0 and 157.0. J.P. Morgan's projections notably diverge from this consensus, particularly with their upward estimate for December 2026 at 164.0, reflecting a more bearish outlook on the yen.
The broader market seems divided on the outlook for JPY against the dollar, with firms like Goldman and MorganStanley keeping their targets significantly lower than J.P. Morgan's. These firms appear to maintain a more cautious approach amid current economic conditions.
Conversely, BofA and Deutsche Bank align somewhat with J.P. Morgan's view, predicting less aggressive depreciation of the yen, yet their targets are still below the expectations set by J.P. Morgan.
The prevailing hawkish stance of the Fed amidst a dovish BoJ may create wider currency spreads, impacting forex liquidity and trade strategies. Traders are advised to position themselves for unexpected volatility as the economic landscape evolves.
Risks to this view
Potential risks include abrupt changes in economic indicators or geopolitical tensions that could affect market sentiment and alter central bank policies, which could further impact JPY valuations unpredictably.
Hello and welcome to this At Any Rate podcast. I'm your host, Arindam Sandilya, co-head of JPMorgan's Global FX Strategy team. I'm joined today on this podcast by two of my colleagues, Gunia Tanase, head of Japan FX Research, and Patrick Locke, senior macro FX strategist in New York.
Welcome to both. Now, coming into this week, we had framed it as a big one for Japan in particular, that the October BOJ loomed large as not only a central bank meeting where we at JPMorgan had a counter consensus call, but a broader marker for the BOJ's reaction function under the new Takahashi government. In the event, I think we did get some important information from the meeting around BOJ's dovishness, and we'll touch upon that with Gunia in just a minute.
But the surprise this week also came from the U.S., where Chair Powell flummoxed us all by throwing the previously foregone conclusion of a December rate cut very much open to question. So unsurprisingly for us in FX, the dollar has rallied this week due to a combination of hawkish Fed and higher dollar yen. But under the hood, there also seemed to be a growing segment of market participants who are becoming more convicted on the idea of a U.S. growth reacceleration.
Obviously, S&P strength comes alongside that, and possibly expectation of capital flows from the rest of the world into the U.S. to chase that equity outperformance. But I think also more fundamentally, worryingly for dollar bears, we are seeing a combination of falling front-end U.S. inflation break-evens, and as a mechanical consequence, a rise in front-end U.S. real yields, which is, if you recall, the exact opposite of the configuration that had delivered trend dollar weakness in H1. So this is, without doubt, something of an uneasy juncture for dollar bears like us, but we still continue to believe that Fed depricing is a limited process by construction, given the Fed's own dovish asymmetry in the politics around it.
That this idea of U.S. growth upside, it's high-profile, no doubt, but it's not the only growth resilience story in town. We got beats on European flash PMIs last week. We got upgrades in Chinese GDP last week on greater-than-expected fiscal support.
And that combination gives us confidence that there is some breadth to this global growth story, and that should help cap dollar strength, should, in fact, promote middle-of-the-smile dollar weakness as well, but we haven't seen a whole lot of that over the past two, three months. And then our own U.S. inflation strategists are flagging that the sharp fall in inflation break-evens that we've seen over the past couple of weeks, that has overshot fundamental anchors. It may already have baked in, to some extent, the likelihood that the Supreme Court rules the IEPA tariffs illegal, and the hearings on this begin next week and will no doubt be a key point of market focus.
Betting markets seem to be pricing this as a 60% probability event, but that tariff discussion is for another day. Maybe, Pat, we can start this conversation with you. Setting stateside, we got this Powell surprise on Wednesday.
What do you make of all of this, and what's the mood stateside? Yeah, hey, thanks, Vrindam. Yeah, look, I mean, it was hawkish from the word go, right?
There were a couple of things, even in kind of the two o'clock release, that stood out. Obviously, first, the kind of the three-way split. We had the hawkish descent.
I don't think we've had a three-way split at the FOMC since 2019, obviously much, much less common than what you'd expect maybe from the BOE. So that went against expectations, and then our economists are noting that even there was kind of a, you know, a soft descent as well. Only eight of the 12 regional Fed brain presidents requested a discount rate cut alongside the meeting.
Two of those were non-voters. The other one actually dissented, which leaves one of the voters who effectively then softly dissented. So, really, from the start, it was interesting, but obviously, like, Powell's tone really stole the show at the press conference.
I thought it was kind of uncharacteristically direct in how he really kind of pushed back on the pricing. I thought it was something that, you know, he kind of signaled out December in particular. I thought that was a little bit unusual.
So he got his point across very, very clearly. So not at all surprising then to see the dollar back up on the day rates do what they did. But I think the real test, and, you know, people are kind of trying to extrapolate how much this can run, and I just don't think enough fundamentally has changed to really kind of warrant like an obvious rethink in the dollar trajectory just based solely on the Fed.
I mean, said differently, there wasn't, to me, an obvious kind of like reaction function shift, right? So in the statement, in his comments, he still kind of left technically that elevated sensitivity to labor market weakness. You know, granted, he wasn't sounding quite so dire on the labor market as he had in the past, but it hadn't, to me, suggested that he really kind of like changed that all up, you know, necessarily.
So still basically inclined to think that they can definitely go in December. I mean, obviously, that's where the market has settled. If you get another kind of like one to two week kind of labor market releases in the next month or two, that probably tilts the scales in favor of easing.
So it's not like we've had this kind of wholesale fundamental rethink about what the Fed is doing or how they're managing kind of the risk balance between the labor market and inflation. Some shifts at the margins, but again, not really enough to say, oh, like we're going to have to have a preemptive end to the rate cutting cycle and the remaining 75 basis points of cuts or whatever is left at the OIS strip need to obviously be forced out. Market's not settling there.
And I think really that's kind of the bottom line, the most important evidence here. As you kind of illustrate in the weekly this week, most of the repricing has been concentrated in the December and the January meetings, right, which is effectively what Powell was asking us to do based on his written commentary. The repricing further out around terminal kind of in the back half of 2026 didn't move as much.
So, again, Fed's taking a little bit more optionality around the turn of the year. Market has delivered that. Market hasn't delivered a more wholesale rethink on the terminal rate.
And by extension, I think that should kind of limit the degree of further dollar weakness just from the federal loan that we got this week. Yeah, I think speaking to clients, I think the pushback is kind of threefold. One is where does this additional hawkishness come from in the absence of data in the midst of this ongoing U.S. government shutdown?
Second is, I think, generally widespread skepticism that the best laid hawkish pivot plans will not survive the first punch in the teeth from weak slash negative NFP prints if and when we get them, whenever we get them. And third, I think, you know, there is an implicit shelf life to all of this in people's heads because of this idea that the Tesla Fed independence revives in January when the new cycle hearings start. And once markets refocus their attention on this one critical issue, then some of this sort of tactical pivot type worries will begin to fade away pretty quickly.
But that's enough about the Fed. Maybe just pivoting to the main course of this week, the BOJ meeting, Junior. You know, this is a big event of the week.
It ended up being much more dubbish than markets had anticipated, certainly even on the non-consensus side of the spectrum in terms of calling for a 25 basis point BOJ hike that was not delivered. So if I can just probe a little bit in terms of having had 24 hours to digest the decision, what elements of both the decision itself, the statement that accompanied it, and Governor Ueda's press conference surprised you the most? Thanks for the question.
So, as you say, that the BOJ had inaction yesterday was as broadly expected, but not in line with our call for a 25 basis point hike. Japanese economists think this decision was not necessarily consistent with macro fundamentals and BOJ messaging since the previous meetings in September. So this suggests that the political consideration had a significant influence on the BOJ's policy decision yesterday.
So the biggest surprises from the meeting were two things. The decision was again made by the 7-2-2 vote, just like in September, and that the inflation outlook and the risk balance in the outlook report were left unchanged from the July report. Regarding the vote, it had been expected that more board members, including Koeda, who is seen as slightly hawkish, would advocate a later hike.
But the result was similar as in September. Board members Tamura and Takada advocated a hike again. In addition, the outlook report continued to emphasize downside risks stemming from weaker overseas demand due to U.S. tariff policy.
This was in stark contrast to the lead FOMC, where Chair Powell downplayed the impact of tariffs on the labor market and inflation expectations, and highlighted the strengths of U.S. AI and consumer spending. Generally speaking, it was surprising that there was no message at all suggesting a late hike in December, even though this can be justified by macro fundamentals.
Governor Ueda flagged the confirmation of the development ahead of the spring wage negotiation as a new required condition for the next rate hike. If we interpret this straightforwardly, the next BOJ hike would be in January. And in fact, our Japan economists now expect the next hike to happen in January.
However, they also believe that if we see acceleration of yen weakness from here, December hike is still possible. Although the BOJ is not in charge of FOMC policy in Japan, July last year and January this year's rate hikes appear to have been heavily influenced by yen movement, I mean the yen weakness. If the BOJ raised rates in December this year, it would be a repeat of this January when the bank proceeded with a rate hike, which was not suggested at the previous meeting.
Yeah, and Mr. Junia, so I'd say that personally I was, you know, the whole meeting was dovish and we are surprised by every time the governor pulls off a dovish act. But you know, of all the three things, I was most surprised by the fact that the outlook report looked just so stale in the light of data that had come in from the last one.
And just given just this morning's Tokyo CPI, which once again came in extremely from two tenths of a consensus, that outlook report does look already sort of outdated. But then, you know, your comments are a good segue into the FX discussion around the yen. Obviously, yen reacted forcefully to the surprise from the BOJ.
So my question is, was that reaction, the quantum of that reaction sort of in line with what you had anticipated in the event that the BOJ did hold this week? And what's your sort of call it the next several weeks sort of outlook on the yen from here? OK, thanks.
Since the holding policy rate and change was widely priced in, I had expected the yen's reaction to be affected by both result and the contents of outlook report. And of course, messages from governor with a press conference. As I said, all of them were generally dovish.
So it was not surprising to see that yen weakness as a whole in the BOJ policy decision. Additionally, the policy inaction at this time might support view that rate hike will be under the Takaichi administration or that US pressure for the BOJ policy normalization and accompanying yen strength might not be so strong, which might have triggered renewed yen selling. Personally, I believe that since price stability is a priority for the Takaichi administration, there is no incentive for them to prevent the BOJ from any rate hikes to stop the vicious cycle between domestic inflation and the yen depreciation.
Therefore, I think market perception that Takaichi is negative for the BOJ rate hikes and favors yen weakness is a little bit misunderstanding. But this will not be proven long until the next BOJ rate hike. As a result, I expect upward risk for the yen to persist the whole time being.
I mean that in coming weeks, might be coming months. However, since both Japan and the US government do not want to see any sharp rally in the yen from here, we maintain the view that some policy responses, such as verbal or actual intervention by Ministry of Finance Japan, or earlier BOJ rate hike, or stronger pressure from the US, will cap limits further upside of the yen if it moves to well above 155. Based on all of this, we have revised our year-end yen target to 156.
After the next BOJ rate hike, now expected in January, we expect the yen to gradually return to a downward trend toward the 150. As the market revises its terminal rate outlook upward in response to the expected changes in BOJ's communication about terminal rate. The BOJ has stated that it will raise policy rate up to 1% at least.
But with the next rate hike, the policy rate will reach 0.75%. Therefore, it is considered necessary for the BOJ to clearly communicate that 1% is not the terminal rate. Our Japan economists maintain their view that terminal rate will be 1.5% or even higher.
Additionally, BOJ's inaction yesterday suggests that they would fall even further behind the car. Given the condition, the textbook theory suggests that a larger hike than the normal case and will be required to contain inflation eventually. However, yesterday's decision suggested that BOJ's strong political consideration and this could dampen the market confidence for the BOJ's policy.
So, given the condition, it is likely that the market would ignore the BOJ's changes in its communication. In such a case, upward risk to our year-end outlook would increase. That's from me.
Thank you. Right. So, basically what you're telling me is you have a point forecast of 156 for the end of the year, but potentially we are looking at a fair amount of volatility around that number because it would probably take a reasonable overshoot of that point forecast in order to get the forcing function of MOF intervention, which then drives you back towards your targets.
So, this is going to be difficult to trade and choppy over the next several weeks. Yeah, not fun. I think so.
Yeah. Okay. Pat, one more central bank question for you.
We have an active bearish view on the Canadian dollar. We did get a Bank of Canada meeting this week. Did that move the deal for you at all?
Yeah. Thanks, Arindam. Yeah, it doesn't really change much for us, I don't think.
I think the market had already been kind of braced for the soft pause. Something important that I've been noting for a while is that there's been pretty little priced into the BOC terminal relative to where rates currently are, which is obviously quite at odds with the U.S. So, if you had like a fundamental rethink about these Fed on the U.S. side, that rate repricing could be a big dollar tailwind.
It's not the same case as CAD. There's only about eight basis points left. So, I expect that follow through to be relatively limited.
Moreover, with respect to the pause, I mean, looking forward to the next year, they still have pretty – it's still at a pretty bearish tone, I think, about the whole Canadian setup. They talked about ongoing scarring, the loss of, you know, potential growth and things like that. So, maybe, you know, maybe this is the end of the cutting cycle.
Maybe not. Our economists here for Canada don't think so necessarily. And GDP, kind of printed just as we've been speaking here today, for August came out at minus three-tenths versus a flat expectation.
So, pretty weak start to the third quarter already. So, I don't see much in the way of kind of like, I guess, invigorating some kind of CAD bullish trend from the BOC this week, which kind of leaves CAD stuck based on, you know, trading some broader kind of beta factors. It's dollar proxy status.
And then, also, carry is obviously entrenched negatively. But, you know, looking forward into next week, we do get the budget. So, that could be an opportunity to materially reassess, you know, the growth outlook a little bit going forward.
So, we're going to be paying close attention to that. But for the time being, just from the BFC, not much to really kind of dissuade me from the current stance. And maybe, you know, last thing for you, Arindam, pass it back to you.
Obviously, ASEAN and APEC, a lot going on in Asia this week. The Xi-Trump summit, kind of most important out of all those. Anything kind of move the needle for you on FX out of that?
Yeah, Pat. I think my overriding emotion from having followed the events over the past week here in Asia is a lot of heat, not a ton of light for FX market participants, if I'm honest. You know, we got broadly three things out of this state visit that Trump was on through the region.
The first is, you know, I think a necessary kind of fruits with China. It was well previewed by Secretary Besant last weekend during his meeting with the Chinese delegation in Malaysia. So, as a result, markets were not surprised by any of the details of what came out.
Basically, a state of execution for a year in terms of the entity list and rare earth controls, which is welcome news for risk markets. The U.S. takes off 10 percent of the fentanyl tariffs. China agrees to buy more soybeans from the U.S., which has been a big deal for President Trump of late.
So, net net, I think this is one more another in a series of tactical truces that we've had over the course of this year. Longevity, questionable. But as of now, you have a left tail risk taken, which I suppose should be worth something for risk markets, except risk markets really didn't price much by way of tariff risk premium to begin with.
The balls are sitting at bargain basement lows. There is not much left to deep price, which is why I think market reaction to the news of the truce has been fairly muted. The second thing that we got, I think, important from the country's perspective was the removal of uncertainty on U.S.-Korea trade relations.
We got the contours of a deal. Importantly, markets were very focused on the $350 billion investment commitment out of Korea. If you recall, there's been some headlines over the past couple of months in terms of the Koreans complaining that they just didn't have enough cash to pony up.
And that apparently was the U.S. condition. The clarity that we got this week was that the 350 was going to be structured in terms of a $200 billion cash agreement, cash commitment, but amounting to no more than $20 billion annually, which the Koreans had said was the upper limit of their comfort threshold. And then another $150 billion in terms of shipbuilding cooperation, which would be funded both in terms of FDI and by loan guarantees.
So that piece seems to be less relevant in terms of direct FX market conversion. But even the $20 billion per year that was agreed upon, I think the details of that is mostly going to be funded via interest on the Bank of Korea's FX reserves, as well as the government issuing dollar bonds, which should not really entail immediate FX conversion. Over the long term, the erosion of the Bank of Korea's earnings on its reserves reduces its ammunition to intervene in FX markets.
That's a slow burn, longer-term negative for the Korean won. But right here, right now, what markets are concerned with is, is there going to be a dollar-Korea flow hitting the market? It doesn't seem like that's going to be the case.
And then I think the third thing that markets did take away from this trip was that Secretary Besant signed a number of currency-related MOUs with ASEAN trade partners like Malaysia and Thailand. Some of it was boilerplate IMF language to not intervene in currency markets for gaining unfair trade advantage. But part of it was kind of new in that the Thais and the Malays would periodically, at least twice a year, reveal to the U.S.
Treasury the details of their FX intervention operations. Again, how much of an impact do we think from this? Not a whole lot, because the problem with the Bank of Thailand has been that they don't buy enough dollars.
They haven't prevented enough IFX appreciation. So I doubt that they're ever going to come under the scanner of the U.S. Treasury in terms of being a manipulator.
And then Malaysia runs one of the lowest FX reserve adequacy metrics in the region. So once again, collection of a lot of dollars from the Central Bank of Malaysia itself should not be a problem that the currency manipulator report will have to grapple with. So net-net, I think there's a lot of news coming out of this week from Asia.
I think the tradable, net tradable impact of all of this for currency markets, probably not a lot. The Malaysian ringgit has rallied a fair bit, I'd have to say, this week. People are attributing some of that to this sort of soft currency accord agreement.
Personally, I have my doubts as to how long this is going to sustain, because we've seen this movie several times in the past. There is some optical sort of window dressing in terms of dollar weakness, currency strength when U.S. dignitaries visit your region. And then the whole thing mean reverts once the state visits are over.
So, you know, color me a little skeptical about the durability of this sort of FX trend. But we've gone on for long enough this week. So let's leave it there for this week.
Thanks to you both for joining in. And thanks to our listeners for dialing in. This communication is provided for information purposes only.
Please refer to JPMorgan Research Reports related to its content for more information, including important disclosures, 2025, JPMorgan Chase & Company, all rights reserved. This episode was recorded on October 31st, 2025.