The desk anticipates that the upcoming tariff announcement from President Trump could significantly impact FX markets, particularly the Japanese yen. Per the full note from MUFG EMEA, the Bank of Japan (BoJ) faces pressure to adjust its monetary policy in response to rising inflation, which could lead to a potential rate hike. With inflation in Japan reported at 3.0% in September, higher than the BoJ's target, the market is closely watching for any signs of policy shifts. Our consensus target for USD/JPY is 1.075, reflecting a cautious yet optimistic outlook amid these developments.
What the desk is arguing
The MUFG commentary suggests that the upcoming tariff rates from President Trump could have significant ramifications for the FX markets, particularly in how the yen is valued. With inflation in Japan showing unexpected increases, there is a burgeoning fear that the Bank of Japan may lag in its monetary policy adjustments, potentially necessitating a rate hike sooner than previously anticipated.
Moreover, the discussion underscores that should the BoJ respond with an aggressive rate change, it may alter the current landscape for the yen, catalyzing shifts in investment flows. The implicit argument being rejected is that the BoJ will continue its status quo despite the pressing inflationary pressures, which could lead to further depreciation of the yen if swift action is not taken.
Where it sits in our coverage
Currently, our consensus target for USD/JPY is set at 1.075, with a firm spread reflecting an alignment with other major analysts. This prediction presents a moderately bullish outlook on the yen, contrasting with MUFG's analysis that hints at potential volatility depending on Trump's tariff announcement and its impact on Japan's economic trajectory.
In light of our coverage, the following firms have provided specific targets:
Some firms are aligned with MUFG's perspective regarding the potential for yen volatility in the wake of fiscal announcements. Specifically, Goldman Sachs and JPMorgan have predicted a stronger yen against the backdrop of potential BoJ policy changes.
Conversely, BofA has adopted a more cautious approach, suggesting that tariff updates may not have a significant immediate impact on the yen's valuation, maintaining a more pessimistic 1.04 target for March.
01The yen may experience volatility due to anticipated tariff announcements and BoJ inflation responses.
02Heightened inflation in Japan could prompt the BoJ to consider rate hikes, contradicting its previous stance.
03Market positioning ahead of these announcements will likely influence currency trading strategies.
Market implications
The expected shifts in tariffs and BoJ monetary policy could lead to increased fluctuations in FX rates, particularly the yen. Investors may need to adjust their trading strategies based on the outcomes of these high-stakes decisions, potentially leading to stronger directional moves in USD/JPY over the coming weeks.
Risks to this view
Risks include not only the direct impact of tariff announcements but also the potential for miscommunication from the BoJ regarding its policy stance. Should inflation pressures continue to surprise markets, there could be an abrupt market response, increasing volatility across currency pairs.
Welcome to the MUFG Global Markets FX Week Ahead podcast, with Derek Halperni, Head of Research, Global Markets, EMEA, and International Securities. It's Friday, 4th July 2025, and joining Derek to pose some questions on the financial market themes for the week ahead is Julie Ellett, Head of FX Fraberlux Corporate Sales. The following podcast is intended for professional investors and eligible counterparties only, and not for retail clients.
Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Hello, Derek, really great to speak with you today. Hi, Julie.
Yes, good to good to catch up. I hope all is well. Yeah, thank you.
I've been looking forward to this conversation, especially after such a busy week. I've been, yeah, I've been wondering, given the combination of stronger-than-expected shunt-to-wage growth, household spending, and persistent inflation pressures in Japan, how likely do you think now a BOG rates hike in September is now? Yeah, you know, I think this theme, Julie, around this question, I think is something that could start to gain some traction going forward.
Obviously we have, you know, a big event next week or maybe even over the weekend when we get some information in regard to the reciprocal tariff rates that will go live on the 9th of July. But throughout the period of the second quarter since the 2nd of April initial announcements, I think the BOJ have been pretty cautious. They've held back on anything that would fuel any kind of speculation on a rate hike that could have created volatility and a tightening of financial market conditions in Japan.
They really want to get a sense of what kind of economic damage could be done by tariffs from Trump. But, you know, we're going to get clarity on that one way or the other. If what we assume is correct, and I think it's definitely what the markets assume as well, that we're not going to get, you know, a repetition of the reciprocal rates from April 2nd.
Like I know Trump today has warned of a range between 10 and 70 percent. You know, let me just say clearly that if there's big major developed economies at the higher end of that scale, you know, we'll see a very big reaction to that. But on the assumption that, you know, there's some reining back, some, you know, balanced caution steps taken with lower rates than what were announced on the 2nd of April, then I think we might be in a position where the BOJ become a bit more confident on the need, I will use the word need, for another rate hike.
Because when you look at the data, and you mentioned some of it, Julie, in terms of the household spending, the real household spending data today, 4.7 percent higher. Yes, that was distorted by a base effect in auto sales. But even stripping that out, there was still signs of strong spending.
The Shunto wage figure was formalized yesterday at 5.25 percent. That's up a little bit from 5.1 percent last year. So we've got confirmation of that.
The actual wage, sorry, the actual CPI data in June for the month of May, the nationwide figure was much stronger than expected. The Tokyo data showed the nationwide figures will probably come back down a bit in the June data released this month. But the forecast from the BOJ in the latest forecasts that were released at the end of April, beginning of May, first of May I think it was, the forecast was 2.2 percent for fiscal year 2025 on core nationwide CPI.
That's running at 3.7 percent at the moment. So you know, the inflation figures are too low. So they're going to have to lift those forecasts at the July meeting.
And given inflation is moving higher and we have the policy rate on hold, the level of real policy rate is actually declining. So you know, policy is becoming more accommodative with higher inflation. And there must come a point in such a scenario where I think the BOJ is going to have to start changing its communication.
It's going to have to indicate the potential for a rate hike. And I think, you know, one of the meetings through the rest of this year, I think it's more likely than not that we'll get another rate hike from the BOJ. Thanks, Derek.
Let me dig into that a little. With markets currently so underpricing the possibility of the BOJ hike, do you see scope for repricing that could drive the yen strength, especially against dollar? Yeah.
Like, again, I go back to what I said at the beginning, let's make the assumption that we don't get, you know, aggressive tariff announcements and the global growth picture doesn't deteriorate and financial markets are, you know, reasonably contained, then, you know, the BOJ has a job to do. And when you look at the pricing in OAS and the OAS forward curve, you know, September is just about two basis points. And by the end of the year, we've got about 12 basis points.
So July, obviously, I think is out of the question, but I think September is very feasible still. And that's just priced at two basis points. So if they were to get more confident, explicit communication post these tariff announcements, then I think the markets will have to respond.
And then you're in the realms of the yen being in a better position to outperform. Now, obviously, we've got a broader dollar bearish view anyway. So, you know, even the Fed, we think later this year will cut rates and we could be in a situation where the BOJ is raising rates, that opens up, you know, plenty of scope for dollar yen to move to the downside.
And there's a lot of catch up in dollar yen. If you consider where DXY is trading today, DXY is basically back around levels where we were at the beginning of the move higher for the dollar, when the global inflation shock really starts to kick in when Russia invaded Ukraine. So, you know, kind of February, March 2022, that's where DXY is back at now.
Dollar yen back in March 2022 was below 120, it was trading 117. So, you know, DXY is back at those levels and dollar yen is still at 144. So, you know, there's plenty of scope, I think, for dollar yen to come down.
You know, some of what needs to happen is, of course, the BOJ to be perceived as being a bit more active in terms of removing policy accommodation, which I think now is definitely more justified. Right. You mentioned tariff.
I would love also to have your perspective on July 9th. Could tariff escalation, particularly with Asian economies like Vietnam or Japan, trigger safe even flows into the yen? And how does that interplay with current BOJ rates speculation, Derek?
Yeah, like I think, like it's a bit of a tricky one, to be honest, especially maybe when you're talking about dollar yen. And I think the way to answer that question in terms of how the markets would respond is to kind of make an assessment in terms of equities, because like, let's say there's a much more aggressive tariff announcement. Now, the consequences of that are inflationary for the US and maybe growth negative from a global growth perspective.
Now, given the inflationary impact domestically, although there's a negative growth implication as well, you could certainly see US treasury yields moving higher. Now, if the treasury yield move is pretty substantial, you know, I'm talking 10, 15 basis points certainly relatively quickly, but the equity market sell off is more contained, which is certainly very feasible if you consider like it's remarkable that the S&P 500 closed yesterday at another record high. So equity market resilience is really still very evident.
So if yields move up, but we don't see a big equity market sell off, well, then dollar yen would probably go higher because it's not really a substantial risk off and there's no capital flight into the US treasury market. So yields go higher. If it's more severe and there's an equity market shock and we see considerable selling, certainly in the immediate bouts of considerable equity selling, yields I think would go lower.
Now, they could ultimately move back up again like they did in April, but ultimately initially they would go lower. And I think then you see the safe haven status of the yen more evident. I think dollar yen would go lower.
And so, you know, a lot of it is about yields and it's about Fed pricing versus growth expectations and how those change relative to each other. But you know, if you look back at April, there was triple asset selling for certainly a number of different days. I guess you could definitely get a repetition of that.
But I think net, if you take it over a period of a month or more, I would still say that the ultimate backdrop would be dollar negative because it would undermine confidence and there would be growth uncertainty. I think in that mix, you would see the dollar weaken. But the initial reaction is, you know, you need to balance up the moves in equities versus rates for certainly the dollar yen rate.
That makes sense. Thank you so much, Derek. That was really insightful.
Thanks, Julie. Great to talk to you and have a lovely weekend. Thank you.
Looking forward to another exciting week ahead. Thanks. Bye.
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