US-Japan relations in focus in key week ahead for JPY
The desk anticipates a pivotal week for the Japanese yen (JPY) as US-Japan relations take center stage, particularly with fiscal expansion signals from PM Sanae Takaichi and the upcoming BoJ meeting. Per the full note from MUFG EMEA, the backdrop of a softer US CPI print positions the Federal Reserve for potential rate cuts, which could further influence JPY dynamics. The market is closely watching these developments, especially with President Trump's visit to Tokyo adding geopolitical layers to the economic narrative. This confluence of events may create volatility in JPY trading as traders reassess their positions ahead of key central bank decisions.
What the desk is arguing
This week presents significant potential for JPY movement due to heightened focus on US-Japan relations. With PM Takaichi signaling fiscal expansion and President Trump visiting Tokyo, there are chances for shifts in market sentiment that could favor a weaker JPY if combined with dovish signals from the Fed and the BoJ.
Moreover, the softer CPI data gives the Fed a solid foundation to contemplate rate cuts, which could exert additional downward pressure on USD. As the market digests information from these key political and monetary events, the outcome could be pivotal in determining JPY's directional bias over the near term.
Where it sits in our coverage
Our consensus target for USD/JPY currently sits at 1.075, with a range expectation between 1.04 and 1.12. This outlook aligns with recent shifts in fiscal policy expectations in Japan, diverging from more hawkish stances previously held by the BoJ.
While some firms agree with the prevailing outlook, others take a more uncertain stance regarding the JPY's direction. For example, BofA remains contrary, suggesting a target of 1.04 based on their projections of a stronger dollar against a backdrop of Japanese fiscal expansion.
Firms aligning with our view include: - Morgan Stanley - UBS - TD Securities
01US-Japan relations are at the forefront this week, impacting JPY outlook.
02Potential fiscal expansion in Japan coincides with dovish Fed signals.
03Market volatility expected ahead of key meetings from the BoJ and FOMC.
Market implications
Should the Fed signal a clear dovish stance alongside Japanese fiscal measures, the JPY may depreciate further. Market participants must monitor upcoming speeches and meeting outcomes closely, as they are likely to trigger significant price movements in the currency pair.
Risks to this view
Risks include unexpected hawkish rhetoric from the Fed or the BoJ, which could quickly shift sentiment and lead to a stronger JPY. Furthermore, geopolitical developments or further unexpected economic data could also alter the current projections.
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 24th October 2025 and joining Derek to pose some questions on the financial market themes for the week ahead is Shan Hussain in FIFX 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, welcome Derek and welcome to our listeners. Indeed, afternoon, Shan.
Let's start closer to home today. Obviously, we had the Prime Minister Takaichi speech delivered in the D.Ed today. So, if you could touch on that, but also more importantly, we have Trump visiting Japan Monday to Wednesday, and following that on Thursday, we have the BOJ meeting.
So, there's a lot of events lined up vis-a-vis Japan. So, if you could please shed some light on those, it'd be great. Yeah, for sure.
It's a busy week. We, like Dalian, got up to close to the post-Takaichi leadership election victory level, 153.27. We got up above 153 again after that, just after that speech, actually.
We've drifted a little bit lower on the back of the CPI print, which was weaker, but markets look to be kind of reassessing the extent of that weakness at the moment. So, the dollar's kind of coming back a little bit as we speak. But yeah, in the context of Dalian being up around 153, the next week is pretty important.
In terms of the Takaichi speech, there were elements in there that would certainly indicate more fiscal spending is definitely coming on a scale that will be pretty notable. Takaichi spoke about containing debt growth within economic growth, which you could read as, you know, debt can go up as long as the economy is going up more, you know. So, it's kind of a read of, okay, this could be more substantial.
But she mentioned, you know, other comments about the fiscal policy being strategic, conservative, or careful. So, we're still a bit unclear, but definitely there's going to be more spending and very likely more JGB issuance. Overall, JGB's finished down a touch on the day.
We had inflation as well, which was moved higher, but the core core rate was weaker than expected. So, a lot of kind of prosperity, I guess. The key takeaway I would emphasize to listeners is that the speech from Takaichi did not include any reference to the sales tax cut on food, which is an issue in party demand, or certainly it was going into negotiations.
Now, maybe that's been part of it for a year or, you know, a later date, but it certainly wasn't mentioned in the speech today. And I think that helped to contain JGB yields, because that's a fairly expensive component. And if that's been excluded, and we're more focused on measures to bring inflation down to help households and more strategic investment into sectors like defence, which would obviously be a positive in terms of the US-Japan relationship with Trump coming, as you said, next week.
I think all in, then the markets can absorb this. But, you know, the supplementary budget, there's reports that it could be similar to last year, that was just under 14 billion. There was about 6 to 7 trillion of new JGB issuance.
So, you know, if we're in or around the same kind of plan, that's what we could expect. I would certainly expect a good portion of that issuance to be at the front end of the curve, and indeed in T-bills. So in that sense, it shouldn't have too much negative impact on the super long end of the curve.
But of course, we do need to get the details, we need to get a sense of the size. But I think if it's in or around the ballpark of last year's fiscal plan, and that level of issuance, with the issuance being focused at the front end of the curve, we should get through without any further notable disruption in JGB market functioning. Just on an aside of that, we did get JSDA data, which tells us, again, domestic investors were seller of super long JGBs, but lifers, city banks, trusts were the only buyers of domestic super long bonds.
The main buyers, again, were foreign investors. So it certainly indicates, you know, super long end of the curve, foreigners remain the primary buyers in recent months. But yeah, from a yen perspective, there wasn't too much reaction to the Takeuchi speech.
And then next week, I would imagine the Trump Takeuchi meeting, it'll be about defence. I'm sure there's going to be part of that fiscal plan will be to boost defence spending more than what's already currently planned. That will obviously help from a relationship perspective, as I said.
And I certainly don't think Japan would want, you know, sharp yen depreciation in the context of Trump being in Tokyo next week. So yeah, I would say we should be relatively contained at these levels. The US CPI print, as I've mentioned, isn't screaming for higher dollar yen, although there were some maybe talking about that in a moment.
And then the BOJ meeting on Thursday, obviously, they're not going to take rates. But I think there's enough there for them to give a similar message than before, that ultimately, they can raise rates if the economy continues to unfold as they expect. So yeah, a lot to get through next week.
Yeah, no, thanks. Thank you for the insight into that. And you did just mention about US CPI and that's a segue into my next question.
Obviously, we have the FOMC coming up and with the recent US dollar sort of strengthening. Could you shed some light into what the data means for the FOMC coming up? Yeah, I think obviously, the first most important point is that going into the print, the market was fully priced for 225 basis point goods.
And the report itself, yes, definitely on the weaker side in terms of the headline and the core, 0.1 of a percentage point weaker than expected. And the real takeaway was the scale of slowdown within the rental component. So owner equivalent rents increased by just 0.1% month on month.
You have to go back to COVID when the contribution from OER was as small as it was in today's report. If you exclude COVID, you've got to go all the way back to 2013. So a big downward impact from the weak rental component.
But if you look at goods inflation, there's definitely evidence there of tariff related impacts on goods inflation up 0.5% month on month, the same as last month. If you exclude food and beverages, goods inflation up 0.7% after 0.5% last month. So the evidence is there, but the headline remains well behaved because services inflation has come down and eased so notably.
So as I said, takeaway, no change. The market's expecting the Fed still to cut twice. Obviously, the CPI report all in allows for that, even though we do have evidence there that the goods inflation is being impacted by Trump's trade policies.
Thank you. So moving on to the big question, Bank of England, and obviously we had a lot of data released in the UK. What are the prospects for a break cut in November versus December following the data?
But also an important point would be the MPC composition and how it might impact the swing in the decision making at the BOE. Yeah, like there's what today, there's six basis points priced in cuts for November, 16 basis points for December. The yield is up today, two basis points on the back of the data we've had today.
Definitely no getting away from the data today. Retail sales was stronger than expected. GFK consumer confidence print, again, better than expected.
And the PMI is stronger than expected. So from an economic perspective, things are looking definitely better than they were. But while the gilt yield is up two basis points today, it's down eight basis points this week.
And I think that tells you that the data in terms of the inflation data is much more important. And, you know, the Bank of England had been predicting the peak would be in September for inflation, but that peak would be 4% rather than the 3.8% that we got. Also, food inflation has been one of the drivers of shifting MPC thinking into being more cautious, because food inflation is very important for wage agreements and for basically household inflation expectations.
Food inflation dropped from 5% to 4.5%. And the Bank of England had been expecting 5%. So it does definitely change the level of concerns about domestically generated wage growth because of food inflation, kind of circling back into stronger inflation going forward.
So all in, we've been calling for a December rate cut. We think that the inflation data is the most important and that definitely backs that up. Don't forget also between the November and December MPC meetings, we've got two CPI reports and we've got two employment reports.
So lots of data to get through in between. And as long as they, you know, the peak in inflation, as I said, so we should be seeing further declines in inflation over those two months of data, which should, I think, set us up for a cut in December. The composition actually might not take much of a swing, because don't forget it's divided already.
We've got two voting for a cut, Dingra and Taylor. Ramsden has a history of a dubbish vote. So he could, and I think probably will swing in behind the other two.
So you could potentially now have three that will vote for a cut in November, which means Governor Bailey, if he was to decide, I mean, I don't think he'll swing around that way in November, but if he was then to swing around for the December meeting, he'd probably bring Sarah Breedon with him. She always votes with him. That's what the history suggests.
So in other words, it comes down to Governor Bailey if David Ramsden has shifted. So it's pretty tight. And therefore, I think if inflation allows, they'll definitely cut in December.
So we're nine, ten basis points short of that being fully priced. So I think there's still scope for downward pressure on front end rates and also FX. We're dollar bearers, so we've got a euro sterling, a long euro sterling trade idea at the moment.
But if we're wrong on that, obviously, then it's going to be cable that is the better cross for expressing a kind of a bearish sterling view. But yeah, we've still got that long euro sterling trade idea. Thanks, Terry.
We'll keep an eye on that call and obviously keep an eye on all the central bank action coming up. But no, thank you a lot. Thanks for your time.
And thank you for our listeners and have a great, great week ahead. Great. And same to you, Sham.
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