Bank of Japan Rate Hike Signal Reinforces Yen Rebound, Says Mitsubishi UFG

07:10 AM EST, 12/01/2025 (MT Newswires) -- The yen (JPY) has been the best-performing G10 currency at the start of this week, said MUFG.

It has resulted in USD/JPY falling to an intra-day low overnight Sunday of 155.31 as it moves further below the high of 157.89 set on Nov. 20, wrote the bank in a note to clients.

The yen's recent rebound has been reinforced by hawkish comments from Governor Kazuo Ueda overnight Sunday, who signaled a higher likelihood of the Bank of Japan resuming rate hikes this month, stated MUFG. In response, the Japanese rate market is now pricing in around 21bps of hikes for the next policy meeting on ec. 19 compared with around 15bps at the end of last week.

It has lifted the two-year Japanese government bond yield above 1.00% for the first time since 2008.

In a speech to business leaders in Nagoya, Governor Ueda stated that the BoJ "will consider the pros and cons of raising the policy interest rate and make decision as appropriate" at the upcoming policy meeting. Ueda added that the real interest rate is still at a very low level.

The comments send the strongest signal yet that the BoJ is preparing to resume rate hikes this month in line with MUFG's forecast. Market participants have remained wary over pricing in an earlier rate hike, given uncertainty over whether the government would push back against it.

However, Governor Ueda noted that "I think I've had frank, good discussions at face-to-face meetings with the prime minister and economic ministers since last month. I intend to continue keep close communications."

After signaling a rate hike could be delivered this month, one would assume that Governor Ueda has had implicit approval from the government, added the bank. The governor went on to add that adjusting the degree of accommodation will be necessary "to guide Japan's economy on to a long-term growth plan, which will ultimately lead to the success of efforts undertaken by the government and the bank thus far."

Overall, the developments are supportive for the yen, and MUFG's forecast for USD/JPY to drop back towards the 150.00 level by early next year. The sharp yen sell-off since Sanae Takaichi won the LDP leadership election and became prime minister was driven both by investor concerns that the BoJ would leave rates on hold for longer and the government would run much looser fiscal policy to reflate Japan's economy, it added.

An earlier BoJ rate hike should help to ease some of those concerns after the government announced a larger extra budget totalling 21.3 trillion yen last month, according to the bank.

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