Mitsubishi UFG Notes Softer Yen on Bank of Japan Rate Hike Speculation Ahead of LDP Leadership Election

07:24 AM EDT, 10/02/2025 (MT Newswires) -- The yen (JPY) weakened modestly at the start of Thursday's European trading session following a closely watched speech from Bank of Japan Deputy Governor Shinichi Uchida, said MUFG.

The Japanese rate market has moved recently to price in a much higher probability of the BoJ resuming rate hikes at the end of this month, wrote the bank in a note to clients. There are currently around 15bps of hikes priced in compared with only 6bps a month ago.

Market expectations for the BoJ to resume rate hikes were encouraged by the release of the latest Tankan survey for Q3, which continued to signal that Japanese businesses remained resilient in the face of higher tariffs while inflation expectations continued to pick up.

However, Deputy Governor Uchida refrained from providing a stronger signal on Thursday that the BoJ is planning to raise rates as soon as this month. Instead, he reiterated that the BoJ will raise rates if the economic outlook is realized. Uchida described Japan's economy as recovering despite some weakness. With regards to tariffs, he stated that the picture of United States tariffs is getting clearer and concerns are fading.

Overall business sentiment was described as at a favorable level. On a cautionary note, Uchida believes that uncertainty is "still high" over the global economy and tariff impact.

Market participants will now switch their focus to Friday's speech from BoJ Governor Kazuo Ueda to see if he provides a clearer signal over the timing of the next BoJ rate hike, added MUFG. The yen has strengthened this week alongside the broad-based US dollar (USD) sell-off, resulting in USD/JPY falling back towards the 147.00 level.

However, market participants are likely to remain reluctant to chase the yen higher for now until there is more clarity over the political situation in Japan.

Similarly, the BoJ may remain reluctant to provide a stronger signal of the timing of the next rate hike until after this weekend's LDP leadership election. The bank still believes that Shinjiro Koizumi is best placed to become the next LDP leader/ Prime Minister of Japan, which, if confirmed, would open the door to more yen upside.

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