Japanese Yen holds gains on BoJ's hawkish tilt

The USD/JPY pair slipped to around 157.85 in early European trading on Friday, as hawkish remarks from Bank of Japan (BoJ) policymakers bolstered the Japanese Yen (JPY) against the US Dollar (USD). BoJ member Junko Koeda stated that the central bank should not be overly cautious about raising interest rates, given the potential upside risks to inflation.

She noted that Japan's financial conditions remain accommodative despite recent interest rate hikes, with little evidence that higher borrowing costs are negatively impacting households and businesses. Koeda emphasized that the BoJ should adjust rates in a timely manner, taking into account the neutral interest rate range. The Bank's next policy meeting is set for October 29-30, with updates on economic growth and inflation projections expected to provide clues about the timing of the next interest rate hike.

Fed Chairman Kevin Warsh, speaking at the IMF event, did not hint at another rate increase during the October meeting, stating he does not predict the outcome of upcoming meetings. Warsh's speech prompted some sellers to exit the Greenback. However, evidence of rising inflation in the US, as indicated by a 6.3% year-on-year increase in the Producer Price Index (PPI) in September, may help curb the USD's decline.

Societe Generale points to the BoJ's more hawkish tone on normalization as a factor helping to shape near-term expectations for the Bank's policy path, alongside the current USD/JPY levels and narrowing US-Japan yield spreads. BoJ board member Koeda's speech, rated 8.2/10 on the historic average, indicates a consistent hawkish stance compared to past Bank caution.

The BoJ's pledge to keep underlying inflation below 2% and the acknowledgment that the September rate hike reflected robust economic data further underscore a readiness for additional normalization. This stance, stressing the accommodative monetary environment and comprehensive assessment of financial conditions alongside funding demand, provides a supportive backdrop for the Yen as markets price a higher terminal rate path and reduced policy divergence with other major currencies.

On the daily chart, USD/JPY is trading below the 20-period Bollinger middle band and the 100-day moving average, with resistance at 157.95, the midline, and the 100-day MA at 159.45 as a stronger barrier to bullish momentum. Support can be found at the lower Bollinger band at 157.05, with a break below this level potentially leading to a deeper correction.