Yen Under Pressure as BOJ Faces Cautious Policy Meeting

The yen is under pressure as investors anticipate a cautious Bank of Japan (BOJ) policy meeting on further tightening. Meanwhile, the U.S. dollar faces its issues with markets expecting rapid rate cuts. Core inflation in Japan rose to 2.8% in August, with overall inflation at 3.0%.

The yen remained under pressure on Friday as investors wagered the Bank of Japan (BOJ) would wrap up a policy meeting sounding cautious on further tightening, while the U.S. dollar had its issues with markets pricing in more rapid U.S. rate cuts.

The yen had a tough week, with the euro gaining 2.2% to reach 159.46 as speculators booked profits on recent long yen positions. The euro also advanced to $1.1160, up 0.8% for the week, approaching the August peak of $1.1201. A break there would aim for the July 2023 top of $1.1275.

The dollar increased by 1.4% for the week to reach 142.84 yen, though it retreated from an overnight high of 143.95. Resistance was recorded at 144.20, while support lay at a recent low of 139.58. The BOJ is widely expected to hold its policy interest rate at 0.25% later on Friday and maintain its outlook that the economy will recover moderately, supported by rising wages boosting consumption.

Data released on Friday showed core inflation in Japan ticked up to 2.8% in August, with overall inflation hitting 3.0%. Samara Hammoud, a currency strategist at CBA, noted Japan's real rate remained deeply negative at around -2.5%, while the BOJ estimated the neutral range to be between -1% and 0.5%.

"As such, there is scope to further raise the policy rate while keeping financial conditions accommodative," Hammoud said. "Our base case remains for the BOJ to raise rates by 25 basis points in October, though the risk leans towards a later hike. The recent financial market turmoil and the upcoming Liberal Democratic Party election may make the BOJ more cautious about raising rates."

The BOJ's policy statements can sometimes be rather opaque, so investors will closely monitor any hints from Governor Kazuo Ueda on the timing and pace of tightening during his post-meeting news conference. DOLLAR DECLINE

Much of the rest of the world is heading in the opposite direction, with markets expecting China's central bank to trim its longer-term prime rates by 5-10 basis points on Friday. China has also been suggesting other stimulus measures, in part enabled by the U.S. Federal Reserve's aggressive easing, which drove the dollar to a 16-month low relative to the yuan.

Markets imply a 40% chance that the Fed will cut rates by another 50 basis points in November, with 73 basis points priced in by the end of the year. Rates are expected to be at 2.85% by the end of 2025, which is now considered the Fed's estimate of neutral. This dovish outlook has bolstered hopes for continued U.S. economic growth and sparked a significant rally in risk assets. Currencies linked to global growth and commodity prices also benefited, with the Aussie topping $0.6800.

The U.S. dollar index remained at 100.69, just above a one-year low. Sterling also gained after the Bank of England kept rates unchanged on Thursday, with its governor saying it must be "careful not to cut too fast or by too much." The pound rose by 1.1% for the week, hitting its highest point since March 2022 at $1.3276.

(With inputs from agencies.)