Bank of Japan Rate Hike Expectations Continue Supporting The Yen, Says Mitsubishi UFG

06:59 AM EST, 12/04/2025 (MT Newswires) -- The weaker US dollar (USD) and drop in United States yields have helped to lower USD/JPY back below the 155.00 level overnight Wednesday, said MUFG.

Japanese policymakers will be hoping that building market expectations for a Federal Reserve rate cut alongside the Bank of Japan resuming rate hikes this month will provide more support for the yen (JPY) and bring an end to the sharp yen weakening trend that has been in place since early October, stated MUFG.

Market expectations for a BoJ rate hike this month were fuelled by the hawkish signal from Governor Kazuo Ueda at the start of this week, wrote the bank in a note to clients. Those expectations have been supported as well by a Reuters report overnight Wednesday stating that the BoJ is likely to raise rates this month, with the government expected to tolerate such a decision, according to three government sources familiar with the deliberations.

One of the government sources was quoted saying "if the BoJ wants to raise rates this month, please make your own decision. That's the government's stance." The comments add to MUFG's view that the BoJ has been given the green light from the government to raise rates and won't stand in its way.

Governor Ueda spoke again overnight in parliament and put forward the view that the current policy rate remains accommodative. However, he was less clear about the neutral policy rate in Japan, added the bank. The governor stated that "unfortunately, it remains a concept that can only be estimated within a fairly wide range at present. We don't know where it lies, but how much interest rates, nominal ones, will ultimately rise and how much will be appropriate will depend on that."

The BoJ has previously estimated that the nominal neutral policy rate could be in a range between 1.00% and 2.50% indicating there is still some room for further hikes in the coming years. MUFG is currently penciling in three more BoJ hikes by the end of next year that would lift the policy rate up to 1.25%.

The rise in short-term yields this week has contributed to yields at the long end of the JGB curve moving higher as well. The 30-year Japanese government bond yield hit a fresh high of 3.45% overnight but has since dropped back by around 4bps after the latest 30-year auction revealed strong demand at higher yields. The bid-to-cover jumped to 4.04, reflecting the strongest demand since 2019.

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