A new risk facing the yen is emerging, with currency strategists in Tokyo warning that the Bank of Japan may hold rates steady before March or later next year.

On Wednesday, the yen fell to its weakest level in over two weeks, as traders reacted to a report by foreign media. The report stated that, according to sources familiar with the matter, even if the Bank of Japan decides to wait until January or later to raise rates, authorities believe it will not come at a significant cost, as there are signs that the risk of inflation overshooting is limited, but they remain open to a rate hike next week, depending on data and market developments.

According to Reuters, five sources familiar with the Bank of Japan's thinking said that the central bank is inclined to maintain stable rates next week, as policymakers prefer to take more time to carefully study overseas risks and clues about next year's wage outlook. Any such decision would increase the likelihood of a rate hike in subsequent meetings held in January or March next year, when more information on wage increases for next year will be available.

Sources say that there is no consensus within the Bank of Japan on the final decision, and some members of the committee still believe that Japan has met the conditions for a rate hike in December. The final decision will depend on each committee member's belief in the likelihood of Japan achieving sustained price increases driven by wages. If upcoming events next week, such as the Federal Reserve's decision (announced just hours before the Bank of Japan's meeting), lead to another plunge in the yen, exacerbating inflation pressure, the Bank of Japan may also be inclined to take action.

Overall, many Bank of Japan policymakers seem in no hurry to pull the trigger. This has slightly raised concerns for yen bulls about potential future risks.

Shusuke Yamada, head of Japanese currency and interest rate strategy at Bank of America in Tokyo, said that if the Bank of Japan's policymakers delay the rate hike for a longer time, the situation would be very different.

Shusuke Yamada stated on Thursday, 'If the rate hike is delayed until March next year, the yen carry trade theme is likely to re-emerge. The yen may again weaken, falling to 155 or slightly below the 157 level touched in November.'

Among economists surveyed by Bloomberg, 44% predict that the Bank of Japan will raise rates next week, while 52% expect a hike in January next year, but overnight index swaps indicate signs that the Bank of Japan will slow the pace of rate hikes. These data suggest that the probability of a rate hike in December has dropped to 19%, with a probability of 78% for a hike in January and 95% for a hike in March next year.

Takeru Yamamoto, a trader at Sumitomo Mitsui Trust Bank in New York, stated, 'If it turns out that they cannot raise rates in January, this could lead to a lack of trust in whether the Bank of Japan can really raise rates. The yen could potentially fall to a higher range of 150 against the dollar.'

Bank of Japan Governor Kazuo Ueda said in an interview with the Nikkei last month that a rate hike is 'just around the corner.' A few days later, a report from Japan's Jiji Press emphasized that internal concerns about raising rates too early are growing within the central bank. Dovish policy committee member Toyoaki Nakamura stated last week that he does not oppose a rate hike, but it will depend on the data to determine this month's policy.

Eiichiro Miura, head of the strategic investment division at Nissay Asset Management Corp, stated that a rate hike is unlikely before a meeting in April next year or later.

However, some, including Carol Kong, a currency strategist at the Commonwealth Bank of Australia in Sydney, noted that further depreciation of the yen could prompt the Bank of Japan to raise rates sooner. She said the latest U.S. inflation data has increased the likelihood that the Federal Reserve will send a hawkish message while cutting rates next week, which would weaken the yen against the dollar and raise the chances of a rate hike by the Bank of Japan.

Article forwarded from: Jin Shi Data