The dollar fell as low as 157.80 against the yen on Friday (October 16). Hawkish hints from Bank of Japan policymakers provided support for the yen, with board member Junko Koeda stating that the central bank should not be overly cautious about raising interest rates. Meanwhile, Federal Reserve Chairman Warsh declined to provide clues about whether there would be another rate hike in October, putting pressure on the dollar. However, a stronger-than-expected rise in US PPI may limit the dollar's decline.

Junko Koeda: We shouldn't be overly cautious; there's still room for interest rate hikes.

Bank of Japan board member Junko Koeda said on Thursday that the central bank should not be overly cautious about raising interest rates given the considerable upside risks to inflation. Koeda added that even after past rate hikes, financial conditions in Japan remain loose, with little indication that rising borrowing costs are harming household and business activity. "The Bank of Japan should adjust interest rates as appropriate, paying close attention to the economic and price situation, while keeping in mind the estimated range for the neutral interest rate," Koeda said. The Bank of Japan's next policy meeting is scheduled for October 29-30. The board will release updated economic growth and inflation forecasts, which traders will be closely watching for clues about the timing of the next rate hike.

Regarding the Federal Reserve: Warsh refused to provide clues, putting pressure on the dollar.

At Friday's IMF event, Federal Reserve Chairman Kevin Warsh did not signal whether there would be another rate hike at the October policy meeting. "I don't predict meetings in advance. I don't believe in indicating what actions I might take at the remainder of the year," Warsh said, reiterating his opposition to using forward guidance and arguing that markets should rely on data interpretation. Following Warsh's remarks, the dollar attracted some sellers. However, signs of rising US inflation may help limit the dollar's decline. Data released by the US Bureau of Labor Statistics on Thursday showed that the Producer Price Index (PPI) rose 6.3% year-on-year in September, compared to a previous reading of 5.6% (revised from 5.4%). This was the largest increase since 2022 and exceeded the expected 5.3%.

Institutional View: Policy Wording Becomes a Key Driver for the Yen

Societe Generale points out that policy rhetoric remains a key driver of yen sentiment, highlighting comments from Bank of Japan board member Koeda, who "warned against excessive caution regarding interest rate hikes." The bank believes this more resolute tone on normalization helps to outline near-term expectations for the Bank of Japan's policy path against the backdrop of current USD/JPY levels and the recent narrowing of the USD/JPY interest rate differential.

Hawkish signals: Higher neutral interest rates keep yen bulls active.

Koede's statements regarding a "significantly higher" neutral interest rate, stabilizing core inflation around 2%, and the need to adjust policy based on upside risks to prices collectively indicate that the Bank of Japan is more comfortable with further tightening, even without a predetermined pace of rate hikes. Her commitment to preventing core inflation from exceeding 2%, and her explanation that the September rate hike reflected resilient economic data, reinforced the tendency towards further normalization. By emphasizing that monetary conditions have remained accommodative and that financial conditions must be comprehensively assessed in conjunction with funding needs, Koede laid a constructive backdrop for the yen, as the market can price a higher terminal interest rate path and less policy divergence compared to other major currencies.

Summarize

The dollar fell to around 157.80 against the yen on Friday, supported by hawkish comments from Bank of Japan board member Junko Koeda. She stated that the central bank should not be overly cautious about raising interest rates, that the neutral interest rate is significantly above 1%, and that underlying inflation is stabilizing around 2%, suggesting there is still room for further tightening. The Bank of Japan's updated forecasts will be released at its meeting on October 29-30, marking the next key juncture. Regarding the Federal Reserve, Chairman Warsh declined to provide clues about the October decision, putting pressure on the dollar. However, a stronger-than-expected 6.3% year-on-year increase in the US September PPI may limit the dollar's decline. (USD/JPY daily chart, source: FX678) At 15:15 Beijing time, USD/JPY was trading at 157.96/97.