Market Update: BoJ stays on hold after reports of JPY intervention overnight, and leaves door open for faster policy normalisation

Highlights: As widely anticipated, the Bank of Japan (BoJ) kept benchmark interest rate unchanged at 1.00 per cent in today’s meeting, but fell short of some mild market expectations that it might conduct a surprise rate hike as a follow up amid reports of JPY intervention overnight. The central bank flagged upside inflation risks as its main concern, and will proceed with further policy normalisation as economic conditions allow. Our base case remains that the BoJ will conduct one more potential 25bp rate hike in December, taking the policy rate to 1.25 per cent by year-end, but the risk of an earlier move in October is rising. We maintain our neutral stance on Japanese equities, JGBs and JPY.

• Japanese equities (Neutral): Despite Japan’s high reliance on imported oil and related inflation worries, markets have weathered the impact as investors continue to lean on stocks that ride on the AI theme, and banks that benefit from higher rates and PM Takaichi’s pro-growth fiscal policies. Although the backdrop is largely supportive, market valuation remains elevated, currently at 17.4x 12-month forward P/E, which is around one standard deviation above its 5-year average of 15.8x. While we are neutral, we still see opportunities in domestic reflation plays in Japanese technology and financials stocks
• JGBs (Neutral): In the near term, we expect headline-driven trading around inflation prints, growth data, geopolitics, fiscal developments, and the JPY. In our view, the varying forces should keep JGBs largely range-bound rather than in a sustained directional trend. As yields have already mostly adjusted to more hawkish policy expectations, we believe a significant shift in JGB market dynamics would likely require a change in US Fed policy or substantial FX intervention
• JPY (Neutral): USDJPY fell as much as 3.3 per cent overnight, as it was reported that authorities entered the currency market overnight to support the JPY. Though intervention buys time, negative real rates and JPY depreciation are continuing to reinforce each other, and MoF intervention alone is unlikely to shift the USDJPY path. In our view, a more hawkish BoJ, more credible fiscal discipline, and possibly targeted capital-flow measures may be needed to reset fundamentals and expectations, alongside a less strong USD