UBS On-Air: Paul Donovan Daily Audio 'Policy peculiarities, and a productivity “miracle”'
Following the Bank of Japan's recent decision to raise interest rates by a quarter point, the yen has experienced a notable weakening. Per the full note from UBS, this move, albeit anticipated, was not unanimous, suggesting underlying dissent that may influence market perceptions of the central bank's commitment to tightening. With August's inflation falling short of expectations, Japanese economic fundamentals seem to be influencing short-term pricing dynamics. The broader market context and positioning could see quiet volatility as traders digest these developments ahead of further data releases.
What the desk is arguing
The desk interprets the Bank of Japan's recent rate hike as a pivotal moment that underlines a more complicated economic landscape. While the decision to raise rates was largely expected, the dissent among board members indicates a cautious approach that could destabilize the yen further in the near term. Per the full note from UBS, the impact of inflation data, particularly the lower-than-anticipated August figures, adds to a nuanced view of Japan's economic trajectory.
Furthermore, the mention of 'official distortions' affecting inflation suggests that market participants should remain skeptical of the underlying economic signals from Japan. The Bank of Japan may consider additional rate adjustments if inflation trends upward or if the current geopolitical landscape remains stable.
Where it sits in our coverage
As of now, our consensus target for USD/JPY sits at 1.075, with a range from 1.04 to 1.12. Some noteworthy targets are from firms like jpmorgan at 1.10 for March 2026 and bofa at 1.04 for the same tenor.
Currently, our perspective leans towards the higher end of the range, reflecting a bearish sentiment on the yen in light of the recent central bank actions and appearing to align with the views of jpmorgan while diverging from bofa's more conservative target.
How other firms see it
Several firms, including db, are closely aligned with our current outlook on the yen's depreciation, particularly in light of the mixed signals from the Bank of Japan. Meanwhile, firms like bofa are taking a contrary position, favoring a stronger yen outlook based on geopolitical concerns.
Watch the USD/JPY trajectory closely, as movements here will provide insight into longer-term shifts in market sentiment related to the BoJ's monetary policy and inflation reports.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Bank of Japan's rate hike is significant but reveals underlying dissent within the board.
- 02August inflation figures were weaker than expected, complicating the market outlook for Japan.
- 03Market positioning appears bearish on the yen amid these developments.
- 04Future rate hikes may be dependent upon volatility in inflation and external geopolitical conditions.
Market implications
Traders should closely monitor USD/JPY movements, particularly around the 1.075 level as a potential pivot. The geopolitical landscape, especially any developments in the Gulf, could also influence Japanese monetary policy reactions, thereby affecting currency pricing dynamics.
Risks to this view
Any reversal in the upcoming economic data or a significant change in the geopolitical situation could undermine the current bearish stance on the yen. Strengthening inflation data could lead the Bank of Japan to adopt a more hawkish stance, potentially lending support to the yen.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Friday the 18th of September. The Bank of Japan raised interest rates overnight by a quarter point.
However, a couple of members disagreed with the move, looking for unchanged rates. Financial markets had been more certain about the rate increase, so the lack of unanimity has caused a modest market reaction. The yen has weakened.
This is your daily reminder that just calling house like a grandmother in a bingo parlour does not itself change economic fundamentals, and economic fundamentals determine pricing in the long run. The Bank of Japan was somewhat different to most other developed economy central banks in that it started the year with an accommodative monetary policy and wished to move to a more neutral stance. The current interest rate could certainly be regarded as being neutral.
Japan's August national inflation data actually came in a little lower than the market had been expecting, but this was due in part to what are politely referred to as official distortions in the data – government intervention to mute the effect of market forces on prices. There may yet be another rate increase in Japan to come. The Bank of England defied this week's trend and left interest rates unchanged yesterday.
However, the language used by bank officials suggests that the oil price is getting to them, and that raises the prospect of an increase in interest rates, always assuming the situation in the Gulf doesn't change significantly. Of perhaps more importance were the changes to the bank's quantitative tightening policy. The bank was an aggressive quantitative tightener in selling bonds, and has now decided to hold a large share of what is left until the bonds mature.
It may sell the rest to the government's debt management office. The direct economics of this are limited, but it does mean that the bank's impact on the bond market is now effectively removed, at least through this particular channel. UK August retail sales figures were strong.
Consumers have the ability to spend and are willing to do so. The warm weather supported clothing and air conditioning unit sales, and alcohol sales were enhanced by the World Cup football competition, where the performance of the national teams has always been best viewed through an alcohol-induced haze. It's also worth noting that with a single simple press release, the UK's productivity position has been transformed, and as is nearly always the case with UK revisions, improved.
A new approach to measuring data substantially increased the UK's past productivity growth in recent years. This does not mean a change in past output. Productivity is the part of the economy that economists cannot explain, and that is now larger than it used to be.
It does mean that for any given level of working population growth in the future, one should expect a higher growth rate and a lower inflation pressure than had previously been supposed. Ahead, we have the European Central Bank's inflation expectations data. It's hard to care about these figures when, clearly, consumers do not have the ability or indeed the desire to change their economic behaviour based on their reported expectations.
And the expectations themselves are not shaped by economic realities. We also get ECB President Lagarde speaking again. Comments from Lagarde so far this week have not really been market-moving.
That's all for today. Have a good day. The UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA SIPC.
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