The dollar declined 0.3% to 142.21 yen, from an overnight high of 143.95, as the Bank of Japan kept its overnight call rate target unchanged at 0.25%
The yen pared its losses on Friday as the Bank of Japan sounded optimistic about growth and hinted it will be judicious about further policy tightening, while the dollar had its own problems as markets priced in more rapid U.S. rate cuts.
It has been a tough week for the yen, with the euro adding 2.2% to 159.46 as speculators booked profit on recent long yen positions.
The euro also firmed to $1.11635, up 0.9% for the week and close to the August high of $1.1201. A break there would target a July 2023 top of $1.1275.
The dollar declined 0.3% to 142.21 yen, from an overnight high of 143.95, as the Bank of Japan did as widely expected, keeping its overnight call rate target unchanged at 0.25% by a unanimous vote.
It maintained its view the economy remained on track for a moderate recovery, but said inflation was moderating and on target, leaving investors a little less reluctant to sell the yen. It also underlined currency volatility as a factor in its thinking.
Governor Ueda is expected to be “cautious yet gradually hawkish”, said Shoki Omori, chief Japan desk strategist at Mizuho Securities. Depending on the degree of this tone, if the hawkish stance is clearly conveyed to the market, dollar-yen exchange rate is expected to trend downward.
Data on consumer prices out on Friday showed core inflation rose to 2.8% in August, while overall inflation reached 3.0%.
Samara Hammoud, a currency strategist at CBA, noted Japan’s real rate remained deeply negative at around -2.5%, while the Bank of Japan estimated neutral to be in a range of -1% to 0.5%.
As such, there is scope to further raise the policy rate while keeping financial conditions accommodative, she said. Our base case remains for the BoJ to next raise rates by 25 basis point in October, though the risk leans towards a later hike.
The recent financial market ructions and the upcoming Liberal Democratic Party election may make the BoJ more cautious about raising rates, she said.
