Over today and tomorrow, the BOJ is meeting for the final time this year. The consensus for the conclusion of the gathering tomorrow is that there won’t be any major policy changes. But, there will be keen focus on comments from the Governor that have opened rampant speculation of potential hawkishness.

The yen has been fluctuating substantially, but of particular interest is the gain against the Euro. Two factors are combining to keep pressure on the shared currency: the economy and inflation. Which means it could be the counterpart to see the largest moves if the yen does end up gaining substantially. This has lead to a major Japanese analyst bank, MUFG, to forecast that the EURJPY will fall below 150 by early next year. Will they be right?

The Upcoming Key Meeting

The BOJ could provide a catalyst for strong growth in the yen, even without doing anything. Although there is always a risk of another surprise tweak in the YCC, the focus among analysts and traders seems to be on “clarity”. That’s because a couple of BOJ officials have made comments in the lead-up to the meeting that have caused rampant speculation among the markets.

The first was Deputy Governor Ryozo Himino a couple of weeks ago, who gave a speech talking about the benefits for the economy of exiting ultra easing monetary policy. He didn’t go so far as to suggest that’s a policy he endorsed at the moment, and didn’t really comment on policy. This left the markets understanding that he was setting the stage for potential tightening, but leaving the key element shrouded in mystery: When? The market already expects the BOJ to leave behind its status as the only central bank with negative rates, but what traders want to know is the timing.

The Boss Speaks

A couple of days later, BOJ Governor Ueda provided even more ambiguity when he said that monetary policy management will become even “more challenging” from the end of the year. The markets rushed to interpret it as a hawkish sign, and that rates might be hiked sooner than expected. But the governor has become notorious for saying things that are initially interpreted as hawkish, only for them to be “clarified” later as not as aggressive as the markets initially expected.

Following the BOJ meeting, Governor Ueda will have ample opportunity to clarify his remarks, and will likely be pressed by reporters on just when ultra easing can be expected to end. Therefore, the market reaction might hinge more on the “clarification” parts of the meeting, than any major policy change.

So, what about that 150?

The yen has been appreciating in anticipation of exiting negative rates, which is a foregone conclusion at this point. Fluctuations happen along the way over expectations of timing. Which has led analysts to conclude that yen pairs could see downward pressure.

Among the weaker counterparts within the majors is the Euro. MUFG points to the potential for slow economic growth in the coming months coupled with faster than expected drops in inflation. This could leave the shared currency weakening, and push the EURJPY pair down through 150. The thing is, we’re heading into a period of slow economic data reports due to the holidays. Which means that the trends set by the data over the next couple of days could be set for the rest of the year.

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