Still-negative Japanese real rates should continue to support USD/JPY: UBS

The Bank of Japan kept its policy rate unchanged at 1.25% last week, forgoing consecutive rate hikes. This marks the central bank's first assessment of underlying inflation, which it deemed generally consistent with its 2% price stability objective. UBS believes this assessment marks an important step and bolsters arguments for further policy normalization.

The central bank's decision to maintain rates suggests it has not signaled a more aggressive tightening cycle. UBS views this as reducing the risk of further significant yen weakness. However, they note that conditions for a sustained yen recovery remain absent. Elevated oil prices, high U.S. yields, and still-negative Japanese real rates are cited as factors likely to continue supporting the USD/JPY exchange rate.