Resilience of Economy Supports Bank of Japan Rate Hike Expectations, Says Mitsubishi UFG

06:46 AM EDT, 08/15/2025 (MT Newswires) -- The jump in United States yields triggered by the stronger U.S. producer price index report helped to lift USD/JPY to a high on Thursday of 147.96, said Mitsubishi UFG.

The pair has since fallen back towards 147.00 overnight Thursday as the yen has strengthened across the board following the release of the latest gross domestic product report from Japan, wrote the bank in a note to clients.

The report revealed that Japan's economy picked up more than expected in Q2, expanding by an annualized rate of 1.0%. In addition, the economic contraction in Q1 of 0.2% was revised as growth of 0.6%. As a result, Japan's economy has now recorded positive growth for five consecutive quarters.

The expenditure breakdown revealed that private final consumption increased for the second consecutive quarter by 0.2% in Q2. Capital investment picked up to 1.3% in Q2 from 1.0% in Q1. Despite tariff disruption, exports (2.0%) increased more strongly than imports (0.6%), resulting in net trade contributing positively (+0.3ppts) to growth in Q2. Export growth may partly reflect some front-loading of demand before the U.S.-Japan trade deal, but it will provide reassurance that the negative impact from trade disruption is less than feared, stated MUFG.

Overall, the report should give the Bank of Japan more confidence that Japan's economy is holding up better than expected so far this year to negative external shocks, it added. The BoJ has already acknowledged that the uncertainty over the economic outlook has eased in response to the U.S.-Japan trade deal, which should further help ease downside risks to growth.

While the BoJ will continue to monitor closely how Japan's economy performs in the coming months, the bank believes there is a higher likelihood that the BoJ will resume rate hikes this year -- perhaps as early as in October.

The Japanese rate market has moved to price in closer to a 50:50 probability of the BoJ hiking rates by October and is currently pricing in around 17bps of hikes by the end of this year. A wider policy divergence between BoJ and Federal Reserve policies heading into fall,, should the Fed cut rates and BoJ hike rates could weigh more heavily on USD/JPY, according to MUFG.

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