The Bank of Japan (BOJ) unanimously voted to raise the policy rate 25bps to 0.75% (widely expected) and reinforced its tightening bias. The BOJ noted 'given that real interest rates are at significantly low levels, the Bank will continue to raise the policy interest rate and adjust the degree of monetary accommodation', BBH FX analysts report.

Neutral rate range remains broad

"USD/JPY surged over 1% to a high near 157.40 because the BOJ may have left the door open to a prolong period of accommodative policy. The BOJ did not sharpen its estimate of the neutral rate range as market participants anticipated. The BOJ still sees the neutral rate to be within a wide range between 1% and 2.5%."

"We would fade that dovish BOJ narrative. In our view, the bar for additional BOJ rate hikes is low. First, the BOJ warned that 'the risk of firms' active wage-setting behavior being interrupted is low', implying that underlying wage and inflation pressure are likely to persist. Second, BOJ Governor Ueda pointed out the policy rate is still some distance from the lower end of the neutral rate range."

"The swaps curve is betting on 75bps of BOJ rate hikes over the two years versus 50bps of easing by the Fed. As such, USD/JPY has scope to converge with two-year implied policy rate differentials and trade closer to 140.00."