Yen Rebound Loses Upward Momentum on Back of Bank of Japan Rate Hike Speculation, Says Mitsubishi UFG

06:30 AM EST, 12/02/2025 (MT Newswires) -- The yen continued to trade at stronger levels overnight following Monday's gains, triggered by the clear signal from Governor Kazuo Ueda that the Bank of Japan is planning to resume rate hikes this month, said MUFG.

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, wrote the bank in a note to clients. 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 Japanese government bond (JGB) curve, and spilled over into a broader sell-off in global bond markets on Monday, stated MUFG. The 10-year JGB yield has risen by around 7bps at the start of this week, and the bank has seen similar-sized moves for the 10-year United States Treasury yield (+9bps), the 10-year German Bund yield (+6bps), and the 10-year United Kingdom Gilt yield (+6bps).

The initial offsetting move higher in yields outside of Japan may be helping to curtail yen strength, although MUFG's expectation for further Federal Reserve and Bank of England easing in the year ahead, while the BoJ gradually tightens policy, should help to narrow yield spreads and encourage a stronger yen.

The long end of the JGB curve has been supported overnight Monday by the auction results from the latest 10-year auction, added the bank. The results revealed solid demand with the bid-to-cover ratio picking up to 3.59 compared with 2.97 at the previous auction in November, and the 12-month average of 3.2. It has helped the 10-year JGB yield drop back lower by around 3bps from the overnight high of 1.89%.

The short end of the Japanese rate market has moved to more fully price in a 25bps rate cut at the Dec. 19 BoJ policy meeting, and is currently pricing around 20bps, pointed out MUFG. Those expectations were supported overnight Monday by the lack of pushback from Japanese officials.

At a post-cabinet meeting press conference, Finance Minister Satsuki Katayama stated that "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 Minoru 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, according to the bank.

The latest developments have supported MUFG's forecasts for the BoJ to hike rates in December and for the yen to rebound gradually in the year ahead.

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