JPY strengthens as BoJ signals December rate hike – MUFG

The Japanese Yen (JPY) has continued to trade at stronger levels overnight following yesterday’s gain’s triggered by the clear signal from Governor Ueda that the BoJ is planning to resume rate hikes this month. USD/JPY initially fell sharply in response to building BoJ rate hike expectations hitting a low of 154.67 but has since risen back up closer to the 156.00-level, MUFG's FX analyst Lee Hardman reports, MUFG's FX analyst Lee Hardman reports.

USD/JPY dips below 155 before rebounding to 156

"The initial price action casts some doubt on whether an earlier BoJ rate hike will be sufficient on its own to reverse the yen weakening trend that has been in place since Sanae Takaichi won the LDP leadership election in early October, and it may still require intervention if the yen continues to weaken. The hawkish repricing of BoJ rate hike expectations lifted yields at the long end of the JGB curve, and spilled-over into a broader sell-off in global bond markets yesterday."

The short end of the Japanese rate market has moved to more fully price in a 25bps rate cut at the 19th December BoJ policy meeting, and is currently pricing around 20bps. Those expectations were supported overnight by the lack of pushback from Japanese officials. At a post-cabinet meeting press conference, Finance Minister Katayama stated 'the specific methods of monetary policy are, and should be, left to the BoJ, as a general rule, and I also believe this is the case'. She added that the government expects the BoJ 'to appropriately implement monetary policy and operations' toward achieving its 2% inflation target.

"Views that were also repeated by Growth Strategy Minister Kiuichi. Governor Ueda recently held meetings with Finance Minister Katayama, Growth Strategy Minister Kiuchi and Prime Minister Takaichi suggesting he was given the go ahead to signal a rate hike this month. The latest developments have supported our forecasts for the BoJ to hike rates in December and for the yen to rebound gradually in the year ahead. Please see our latest monthly FX Outlook report for more details"