Market News

Mia Glass and Vassilis Karamanis

(Bloomberg) -- The yen hit its strongest level against the dollar since December, outperforming other major currencies on Thursday amid growing speculation the Bank of Japan will hike rates sooner rather than later.

Japan’s currency traded at 150.14 against the dollar as of 6:33 a.m. in New York after climbing as much as 1% to 149.95 earlier, a level it hasn’t touched since Dec. 9. Government bond yields also rose, with the 10-year benchmark hitting its highest level since 2009.

Overnight index swaps are pricing in an 84% chance of a rate hike by the central bank’s July meeting, compared with about 70% odds at the start of this month, with a hike now seen as certain by September.

Japan’s recent data has supported the BOJ’s case for raising rates, with gross domestic product outperforming forecasts and nominal wages jumping by the fastest pace in nearly three decades. Central bank governor Kazuo Ueda also said on Thursday that he did not discuss rising yields in a meeting with Japanese Prime Minister Shigeru Ishiba.

“BOJ Governor Ueda and Prime Minister Ishiba’s meeting probably provided yen bulls enough confidence to chase dollar-yen lower after parsing through Ueda’s remarks,” says Alex Loo, a macro strategist in Singapore. “Given the absence of any discussion on the recent bout of yen strength and rising Japanese bond yields, we could interpret that authorities are more comfortable with further hikes.”

BOJ Board Member Hajime Takata also said on Wednesday that it’s important to continue considering gradual rate hikes, while also noting that Japan’s bond yields are moving in line with the market’s view of the economy.

READ: BOJ’s Hawkish Member Calls for Further Rate Hike Consideration

Options traders rushed to add bullish yen exposure as the currency rallied in the spot market.

Hedge funds bought structures that pay out if the yen strengthens to between 145 and 140 per dollar over the next three to six months, according to currency traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly.

A closely watched gauge of market sentiment and positioning that covers one-year expectations shows that investors are now the most bullish the yen since mid-October. When it comes to the short-term, demand for the yen picked up at the second-fastest pace in three months, while hedging costs are poised for the strongest close in more than a week.

“It’s significant that Takata didn’t express any concern about rising yields,” said Yujiro Goto, head of FX strategy at Nomura Securities Co., in a note. That leaves room for further rises in government bond yields and the yen, he said.

What Bloomberg strategists say...

USD/JPY’s downward path will be enhanced after BOJ Governor Ueda said he didn’t discuss rising yields in a regular meeting with Japanese PM Ishiba. If there is no pushback from the Prime Minister on the direction of JGBs, it is effectively a green light to raise interest rates again. Which is being priced into a stronger yen and lower JGBs.

— Mark Cranfield, Markets Live strategist. Read more on MLIV.

The yen’s appreciation also comes before the nation’s CPI data on Friday, where a stronger-than-expected print may push traders to buy the Japanese currency.

Fast money funds are positioning for a strong Japanese CPI print, according to an Asia-based FX trader, while overnight hedging costs rose to a one-week high. Economists surveyed by Bloomberg expect a median of 4% for the CPI data, a figure it hasn’t seen since January 2023.

Read: Dollar Eyes December Low Versus Yen at 148.65: Major Techs

“BOJ rate-hike speculation could be fueled further if the inflation print tomorrow comes in stronger,” Charu Chanana, chief investment strategist for Saxo Markets Pte in Singapore. “It looks like 148.65 is the key support level, which it could potentially get to tomorrow if CPI comes in higher than expected.”

Still, the yen faces headwinds from Japan’s own retail investors, who are hungry for overseas stocks as they seek better returns than at home, where interest rates remain negative when adjusted for inflation. The yen’s strength may also give the BOJ less of a reason to hike rates sooner.

Read: Japan’s Love of Foreign Stocks Risks Pushing the Yen Even Lower

“If the yen stays below 150 for an extended period of time, it would make the BOJ think twice about the timing of the next rate hike,” said Min Joo Kang, ING’s senior economist. “We expect a 25 basis-point hike in May, but this could be delayed until the summer.”

--With assistance from Umesh Desai and Masaki Kondo.

(Updates prices.)