The Japanese yen surged to its strongest level against the U.S. dollar since December on Thursday, outperforming all major currencies. The yen rose as much as 0.8%, reaching 150.21 per dollar, a level unseen since December 9. The rally comes amid growing speculation that the Bank of Japan (BOJ) may raise interest rates sooner than expected.
The uptick in the yen’s value coincided with a rise in Japanese government bond yields, with the 10-year benchmark hitting its highest point since 2009. Overnight index swaps are now pricing in an 83% likelihood of a rate hike by the BOJ’s July meeting, up from roughly 70% earlier this month. A rate hike is now expected by September.
Despite the growing expectations, BOJ Governor Kazuo Ueda stated Thursday that rising yields were not discussed during his meeting with Japanese Prime Minister Shigeru Ishiba. Additionally, BOJ Board Member Hajime Takata emphasized on Wednesday the importance of considering gradual rate hikes, while noting that Japan’s bond yields are moving in line with market expectations for the economy.
Yujiro Goto, head of FX strategy at Nomura Securities Co., observed that Takata’s lack of concern about rising yields leaves room for further increases in both Japanese government bond (JGB) yields and the yen.
The recent positive economic data from Japan has also reinforced the case for tightening monetary policy. Japan’s GDP has surpassed expectations, and nominal wages have risen at their fastest pace in nearly three decades.
Mark Cranfield, a strategist at Bloomberg, noted that the yen’s appreciation is linked to BOJ Governor Ueda’s comment on yields. If there is no pushback from the Prime Minister regarding JGBs, it would effectively signal a green light for further interest rate hikes, which is already being priced into a stronger yen.
The yen’s strength also precedes Japan’s upcoming consumer price index (CPI) data release on Friday. A stronger-than-expected CPI report could lead traders to further buy the yen. Economists surveyed by Bloomberg anticipate a median CPI growth of 4%, a level not seen since January 2023.
Mizuho Securities’ Shoki Omori highlighted that should Japan’s national CPI exceed expectations, there is a significant possibility that the USD/JPY could fall below the 150 mark, or even dip further. This movement is also supported by underlying dollar-selling pressures and rising geopolitical risks that have bolstered demand for the yen.
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