USD/JPY broke decisively above 151.00, climbing to an eight-month high near 153.00 and setting up a potential test of 155.00. The yen’s weakness reflects expectations of continued stimulus under incoming Prime Minister Sanae Takaichi and soft wage data that argue for a cautious BOJ. Still, with growth and inflation improving, the central bank is likely to proceed with another rate hike at its October 30 meeting, even as markets remain skeptical, BBH FX analysts report.

Soft wage data undermines BOJ normalization hopes

"We expected USD/JPY to top-out around 151.00. We were wrong. Instead, USD/JPY easily punched through key resistance levels to hit an 8-month high just under 153.00 and setting the stage for a test of 155.00. Weighing on JPY is the pro-stimulus agenda of Sanae Takaichi, who’s set to become Japan’s next prime minister."

"Moreover, Japan’s August cash earnings data was soft and argues for a cautious Bank of Japan (BOJ) normalization cycle. Nominal cash earnings fell more than expected to a three-month low at 1.5% y/y (consensus: 2.7%) vs. 3.4% in July (revised down from 4.1%) while the less volatile scheduled pay growth for full-time workers remained subdued at 2.4% y/y for a second consecutive month (consensus: 2.5%). Overall, Japan wage growth is not a source of significant inflation pressures given annual total factor productivity growth of about 0.7%."

"Nonetheless, we are sticking to our view that the BOJ will resume raising rates at the upcoming October 30 meeting. Japan’s Tankan business survey points to an ongoing recovery in real GDP growth and underlying inflation is making good progress towards the BOJ’s 2% target. The swaps market price-in less than 30% odds of a 25bps rate hike to 0.75% in October."