USD/JPY: BoJ to normalize rates by more than is currently priced-in – BBH

USD/JPY is trading heavy under 148.00, BBH FX analysts report. 

Faster wage growth is an upside risk to Japan’s inflation outlook

"Japan underlying wage pressures gained traction in January and could force the Bank of Japan to normalize rates by more than is currently priced-in. The policy-relevant scheduled pay growth for full-time workers rose 3% y/y (consensus: 2.9%) vs. 2.8% in December, matching the July 2024 series high of 3%."

"Of note, Japan’s biggest trade union group Rengo is demanding larger wage hikes. Members are asking an average wage increase of 6.09% this year, up from last year’s 5.85%, and seeking more than 6% for the first time in more than three decades. Faster wage growth is an upside risk to Japan’s inflation outlook." 

"The swaps market is pricing in 75bps of tightening over the next two years that would see the policy rate peak near 1.25%."