FX Daily Snapshot

The yen strengthened toward the 155.00 area ahead of Friday’s BoJ meeting after a Tankan survey showed resilient business sentiment (large manufacturers +1 to 15; large non-manufacturing 34), planned capex up 12.6%, and rising input/output price indexes (40 and 25), while a BoJ branch wage report signaled broadly steady wage growth—these readings leave a 25bp BoJ hike almost fully priced and support expectations for gradual tightening (we see two further 25bp hikes in 2026); Bloomberg also reported the BoJ may begin a very gradual ETF unwind (~JPY330bn/year from JPY83tn). Separately, China’s November retail sales slowed sharply to 1.3% y/y (from 2.9%) amid weak domestic demand and housing headwinds, yet policymakers have been more tolerant of renminbi strength and USD/CNY slipped below 7.05, so further CNY upside may be constrained by soft activity. Overall, FX and market direction now hinge on BoJ guidance and execution of policy normalization, external risk moves (e.g., a sell-off in US tech that could unwind yen-funded carry trades), and Beijing’s ability to revive domestic demand.

Analysis

The yen strengthened toward the 155.00 support area ahead of Friday’s Bank of Japan meeting after the Tankan survey showed resilient business sentiment: large manufacturers rose +1 point to 15, large non-manufacturing held at 34, planned capital expenditure across large firms was up 12.6% and the five‑year inflation expectation averaged 2.4%. Input and output price diffusion indexes climbed to 40 (+2) and 25 (+1) respectively, reinforcing visible inflationary pressures that align with the BoJ’s view of a sustained recovery in underlying price trends.

A BoJ special branch report on wage setting showed broad continuity in expected salary growth (29 branches expect similar raises in FY2026, two higher, two lower), and markets have almost fully priced a 25bp rate rise this week; Bloomberg reports the BoJ may begin a very gradual ETF unwind next month (book value ~JPY83tn holdings, unwind ~JPY330bn/year), which should limit market disruption. The policy update and communicated path for further gradual hikes — MUFG expects two additional 25bp hikes in 2026 — will be the key determinant of whether the recent yen appreciation is sustained or reversed.

China’s domestic data add a constraining backdrop: November retail sales slowed to 1.3% y/y from 2.9%, the weakest since December 2022, and policymakers flagged boosting domestic demand as a priority while tolerating some RMB strength; USD/CNY has retreated below 7.05. Soft consumption and persistent housing weakness temper the case for near‑term renminbi appreciation despite record trade surpluses, so FX and asset positioning should be contingent on incoming Chinese activity and BoJ guidance rather than current momentum alone.

Key Decisions for Investors

• Consider tactically increasing JPY exposure (e.g., long JPY/short USD or trimming USD/JPY short positions) into the BoJ meeting given a 25bp hike is almost fully priced, but use tight stops tied to the BoJ's forward guidance outcome
• If the BoJ signals a credible path of gradual tightening, bias toward Japanese rate‑sensitive assets (financials, domestically focused securities) and add exposure incrementally on confirmatory communication of further 25bp moves
• Monitor the reported BoJ ETF unwind (JPY83tn book, ~JPY330bn/year) as a modest supply factor for Japanese equities and avoid making large allocation shifts in response to the initial announcement alone
• Trim or avoid incremental exposure to China domestic consumption‑linked names until retail sales and housing indicators show stabilization, and watch policy announcements around domestic demand support before increasing risk
• Hedge FX risk for portfolios with cross‑border exposure: protect against yen appreciation driven by risk‑off moves or unwind of yen‑funded carry trades, and monitor US tech sector volatility as a potential catalyst for yen strength