The phrase “inflation has reached the standard” boosted the yen. The market is betting that the Bank of Japan is only one step away from raising interest rates in December

The Zhitong Finance App noticed that after the Bank of Japan kept the benchmark interest rate unchanged with an 8-1 voting result, the yen basically maintained its growth rate. The Bank of Japan also hinted that potential inflation had reached the 2% target, opening the door for interest rate hikes in December. Market focus is now turning to the press conference held by Bank of Japan Governor Kazuo Ueda at around 3:30 p.m. local time.

In the Bank of Japan's October 30 resolution, what was most surprising was not interest rates, but the acceleration of ETF sell-offs. The central bank announced that it would accelerate the pace of ETF sales to about 860 billion yen (about 5.5 billion US dollars) per year. This change broke the market's previous expectations and also led to a tit-for-tat interpretation.

The Bank of Japan has held huge ETFs for a long time, which is an iconic legacy of its many years of easing policy. Previously, the central bank made it clear that these positions would be gradually sold over a period of more than 100 years to avoid impacting stock prices. This statement has given investors a “reassurance pill” for a long time.

The sell-off is now speeding up, which means that this “reassurance pill” is being taken down. However, there are clear differences in the market over the meaning of this signal.

The “change” and “immutability” of the resolution

What remains constant is the interest rate itself; what is changing is two key signals. First, the policy statement suggests that potential inflation has reached close to the 2% price stability target, pointing to further tightening; second, the pace of ETF sell-off suddenly accelerated from a “more than 100 year sell-out” reassuring arrangement to about 860 billion yen per year. The former is a substantial shift in monetary policy, while the latter is an acceleration of balance sheet normalization, which together forms the hawkish undertone of this round of resolution.

Inflation “meets standards”: paving the way for December interest rate hikes

Senior macro strategist Ron Odahen gave the clearest characterization: the statement that inflation has reached the target level of the policy is essentially tantamount to declaring victory in the re-inflation effort that began in 2012 and continued through the Abenomics era. This “victory declaration”, along with an assessment of the risk of rising prices, paved the way for a restart of interest rate hikes in December this year.

OCBC foreign exchange strategist Shen Maoxiong made a similar judgment. He believes that the resolution itself was no surprise, but the hint that “the official inflation target has been achieved” indicates that the policy will be further tightened in the future, which should benefit the yen.

Bank of Hong Kong strategist Shogo Karitani (Shogo Karitani) is relatively neutral, pointing out that the inflation-related wording in the statement is basically in line with expectations; the Bank of Japan only indicates that potential inflation has reached close to the 2% price stability target.

ETF sell-off is speeding up: a dispute over signals

The ETF sell-off was the most unexpected part of this resolution, and market interpretations were divided.

Shogo Kariya is on the hawkish side: the “unexpected” acceleration in ETF sell-off is another step towards normalizing monetary policy. It should be viewed as a hawkish signal, and has already triggered some moderate yen buying. However, he added that as far as the foreign exchange market is concerned, the ETF sell-off is essentially a stock market issue.

Shinkin Asset Management strategist Kazuki Sawamura (Kazuki Sawamura) gave a more complicated set of judgments. On the one hand, he is worried that the previous “sold out in over 100 years” position reassured investors. Now, after speeding up, investors may form expectations that “stock prices will rise again and sell faster”. This kind of self-reinforcing feedback may suppress room for growth in the market for a long time. On the other hand, he also calmly estimated that the scale of the sell-off was about 10 billion yen per day, while the average daily turnover on the main board market of the Tokyo Stock Exchange was about 10 trillion yen. The sell-off was only 0.1%, and the actual impact on supply and demand was limited.

The trend of the yen: anchored range and external disturbances

Homin Lee is the most clear when it comes to the yen's future market. He expects Kazuo Ueda to more clearly express hawkish tendencies at the afternoon press conference to anchor market expectations for the December policy meeting and reduce unnecessary complexity compared to foreign exchange intervention. He believes that the Bank of Japan's idea of quarterly interest rate hikes should be sufficient to anchor the yen to the 155 to 160 range against the US dollar. In particular, the upward space for the dollar against the yen is constrained by the threat of credible market intervention.

Shen Maoxiong, on the other hand, suggested disturbances from external variables: oil prices are complicating the recent outlook for the US dollar against the Japanese yen. The risk that the US-Iran conflict will escalate again after the US midterm elections has boosted oil prices, which may prevent the US dollar from fully benefiting from the weakening of the US dollar caused by artificial intelligence concerns.

Shogo Kariya brought his eyes back to his eyes: the ETF sell-off is mainly a stock market issue. For the foreign exchange market, the focus should turn to Governor Ueda's press conference to find clues about the future direction of monetary policy.