Japanese Yen: Policy risks support higher yields – MUFG

MUFG’s Lee Hardman notes that the Japanese Yen (JPY) has weakened again, pushing USD/JPY back above 162.00 and coinciding with further selling at the long end of the JGB curve. Hardman argues that the Bank of Japan (BoJ) is behind the curve, with inflation expected to accelerate and fiscal concerns mounting. MUFG now projects the policy rate at 1.50% by January 2027, with the next hike in September.

BoJ tightening expectations and fiscal risks

"The yen has re-weakened at the start of this week resulting in USD/JPY rising back above 162.00 after hitting a low of 160.49 on Friday. There had been speculation at the end of last week that Japan could intervene again to support the yen during the US holiday when trading conditions were less liquid, but no action has been taken contributing to the yen giving back some its recent gains."

"The ongoing steepening of the Japanese yield curve stands in contrast to flatter curves in the US, UK and Germany. The combination of the weaker yen and rising long-term JGB yields reflects some renewed fiscal concerns in Japan, and concerns that the BoJ remains behind the curve in tightening monetary policy."

"Inflation in Japan is expected to accelerate through the 2H of this year and into next year. It will keep pressure on the BoJ to normalize monetary policy further."

"We currently believe that the Japanese rate market is underpriced for further BoJ tightening. The BoJ’s recent communication has more clearly flagged upside risks to inflation including the faster pace of rising costs passing through to higher prices."

"We now expect the policy rate to reach 1.50% by January 2027 with the next hike in September. There are currently only around 6bps of hikes priced in by September leaving room for short-term yields to keep moving higher."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)