The Japanese Yen weakened despite Japan’s rate hike, but Rabobank’s three-month forecast rests on stronger wages and a lasting return of domestic inflation.

Rabobank’s three-month FX forecast puts the US Dollar to Yen exchange rate (USD/JPY) at 154.00, below Friday’s close near 156.88 after a week of solid US Dollar gains.

The forecast was set before Friday’s Bank of Japan decision, when the bank warned that an expected hike might fail to satisfy Yen buyers.

“While profit-taking on fresh long JPY positions cannot be ruled out following the BoJ meeting tomorrow, we are optimistic that the economic reforms in Japan can help sustain USD/JPY around current levels in the coming months. Our 3-month USD/JPY forecast is 154.00.”

The subsequent move has made that target more demanding: the pair rose 0.46% on Friday and 2.19% over the week, leaving 154 around 1.8% below its close.

Japan’s central bank voted 7-2 to raise its policy rate to 1.25%, effective from 24 September.

Governor Kazuo Ueda nevertheless said: “We don’t assume a specific pace for further interest rate hikes.”

That caution matched the vulnerability Rabobank had identified, while the Federal Reserve’s rate increase added a competing source of support for the Dollar.

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Wages underpin Rabobank’s case for the Yen

Rabobank argues that Japan’s recovery has become strong enough to support tightening without requiring an immediate acceleration in rate rises.

“Greater evidence of domestically generated inflation stemming from real wage data, a resilient economy aided by corporate Japan’s involvement in the semi-conductor supply chain and stock market reforms are all JPY supportive factors.”

The bank highlighted July’s 2.4% annual increase in real cash earnings as evidence that stronger pay is supporting Japan’s escape from decades of weak inflation.

For the 154 forecast to work, that domestic improvement must translate into renewed demand for the Yen despite higher US rates.

Friday’s reaction illustrates the risk: delivering a widely expected hike offers limited currency support when investors want reassurance about the next one.

Exchange Rates UK Research

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