Yen Surges to Multi-Month High on BOJ Rate Hike Expectations
The Japanese yen reached its strongest level against the U.S. dollar since December, outperforming all major currencies on Thursday amid expectations of an imminent Bank of Japan (BOJ) rate increase.
The yen surged by 1% to 149.95 per dollar, a level last seen on December 9th. Government bond yields also rose, with the 10-year benchmark hitting its highest since 2009.
Overnight index swaps now indicate an 85% probability of a rate hike at the BOJ's July meeting, up from 70% earlier this month. A hike is widely anticipated by September.
BOJ Governor Kazuo Ueda stated on Thursday that rising yields were not discussed during his meeting with Japanese Prime Minister Shigeru Ishiba. However, BOJ Board Member Hajime Takata emphasized the importance of considering gradual rate hikes while acknowledging that bond yields are aligning with market expectations for the economy.
"Takata's absence of concern about rising yields is significant," said Yujiro Goto, FX strategy head at Nomura Securities Co. "This suggests further potential for increases in JGB yields and the yen."
Recent economic data has supported the BOJ's case for hiking rates, with GDP exceeding forecasts and nominal wages experiencing their largest increase in nearly three decades.
"The underlying trend of selling pressure on the dollar, combined with heightened geopolitical risks, is also contributing to the yen's strength," said Shoki Omori, chief global desk strategist at Mizuho Securities Co. in Tokyo.
Bloomberg strategists anticipate further weakening in USD/JPY, citing Governor Ueda's lack of concern about rising yields during his meeting with the Prime Minister. The yen's appreciation comes ahead of Japan's CPI data release on Friday, with a stronger-than-expected reading likely to fuel buying pressure on the Japanese currency.
However, the yen faces challenges from Japanese retail investors, who are attracted to higher returns abroad due to persistently negative real interest rates at home.