Japanese Yen Gains on BOJ's Hawkish Tone, Open Options on Rate Hikes
The Japanese yen (JPY) extended its appreciation against the US dollar (USD) following comments from Bank of Japan (BOJ) Governor Kazuo Ueda. Ueda signaled a willingness to consider a faster pace of interest rate increases, leaving the bank's options open after its first hike since July 2022.
The JPY strengthened by 0.8% to 154.85 against the USD, responding to Ueda's remarks during a post-decision press conference. He suggested that the likelihood of achieving the central bank's economic outlook was improving.
Japanese government bond yields rose initially, with two-year and five-year yields reaching their highest levels since 2008. However, 10-year JGB futures turned positive, rising 18 ticks to 140.85.
The BOJ indicated a more rapid increase in inflation than previously forecast. Ueda also acknowledged the impact of uncertainties surrounding US tariff policy, noting that foreign exchange fluctuations had a greater effect on prices than in the past.
The widely anticipated rate hike provided support for the JPY, which has been pressured by the wide interest rate differential between the US and Japan. The Federal Reserve has been indicating a slowdown in monetary easing.
"His acknowledgment of the weak FX's increased impact on import inflation is hawkish," said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken. "The upward revisions in inflation forecasts also make it difficult to maintain a dovish stance."
The BOJ's rate hike was its third in less than a year, bringing the policy rate to its highest level since 2008. A significant weakening of the JPY could prompt Japan to intervene to support the currency. Finance Minister Katsunobu Kato has recently stated that authorities will take appropriate action to address excessive volatility.