Yen Reacts To Pivotal Wage Settlements, All Eyes Turn to BoJ

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The Japanese Yen was volatile following the release of wage figures that are likely to trigger an interest rate hike at the Bank of Japan as soon as next week.

Friday saw the release of the first round of Japan's Rengo wage deals, showing the largest increase in the last 30 years.

The Bank of Japan (BoJ) has said it wants to see these figures before deciding whether or not to finally exit its Negative Interest Rate Policy (NIRP), judging that higher wages are a sign the country is finally exiting its multi-year deflationary rut.

Annual wage hikes increased to 5.28% vs 3.80% a year ago and base pay is set to rise to 3.70% (vs 2.33%) last year.

"USD/JPY fell following the announcement but rebounded quickly. The figures meet the BoJ’s bar on wages. The probability of seeing a March hike is higher. Now it all depends on how cautious Ueda wants to be and whether he feels confident enough on the economic and inflation momentum," says Evelyne Gomez-Liechti, Rates Strategist at Mizuho.

The Bank of Japan meets next week to decide whether or not to raise interest rates, with analysts saying the decision will be a close call.

For sure, if the BoJ opts to keep interest rates unchanged, the Yen would likely fall given the building expectations for a hike. However, the extent of the declines depends on the nature of the guidance.

"With the market pricing in bit under a 70% chance of a rate hike, no move by the BoJ next week would see the JPY weaken unless Governor Kazuo Ueda were to strongly indicate likely action at the April meeting," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

If the Bank indicates an April rate cut is a high likelihood, the Yen can ultimately retrace any post-decision losses.

What the BoJ does regarding exiting its Yield Curve Control - a form of quantitative easing to stimulate the economy - will also matter.

Furthermore, a question surrounding the end of ETF purchases - another stimulatory programme - will be considered.

So there are some moving parts to watch here, making the Bank of Japan the highlight in a busy week of central bank decision-making.