Yen Strengthens as Tankan Survey, Wage Report Reinforce Expectations for Bank of Japan Rate Hike, Says MUFG

06:32 AM EST, 12/15/2025 (MT Newswires) -- The yen (JPY) strengthened overnight Sunday ahead of this week's Bank of Japan policy meeting on Friday, said MUFG.

USD/JPY has fallen back toward support at the 155.00 level, wrote the bank in a note to clients. The yen has been lifted by the release of the latest Tankan survey, which keeps the BoJ on track to resume rate hikes this week.

The survey revealed that business sentiment in Japan remained resilient in the face of trade disruption. Business confidence among large manufacturers rose by 1 point to 15 in Q4, while confidence for large non-manufacturing firms held steady at 34. The survey also revealed that large firms across all industries plan to increase capital expenditure on average by 12.6% in the current fiscal year, highlighting that recent policy uncertainty in Japan hasn't significantly discouraged firms from stepping up spending plans.

With regards to inflation, businesses see inflation at 2.4% in five years' time running well-above the BoJ's 2.0% inflation target encouraged by further evidence of tightening labor market conditions. The diffusion index for input prices for large manufacturers rose by 2 points to 40 in Q4, and the output price index rose by 1 to 25, indicating inflation pressures continue to build heading into year-end.

At the same time, the BoJ released a special branch report overnight Sunday on companies' wage-setting behavior in Japan. The report revealed that 29 of the central bank's offices expect companies to raise salaries at about the same rate in fiscal year 2026 as in the current fiscal year.

On the other hand, two branches expect higher wages and two see lower wage growth. The report noted that "it seems that the number of firms expecting a clear improvement in their profits is not large, partly owing to the effect of US tariff hikes."

Still, most firms "seem to consider that it is necessary to raise as much wages in fiscal 2026 as in fiscal 2025 or to a similar extent as the prevailing wage formed by other firms, with a view to retaining staff and improving their motivation amid persistent, severe labour shortages."

Overall, the latest Tankan survey and special branch report on wage growth should give the BoJ confidence that Japan's economy will continue to evolve in line with its outlook, supporting the case to resume rate hikes this week, stated MUFG. A 25bps hike from the BoJ is almost fully priced in now.

Whether the yen continues to strengthen heading into year-end is likely to depend more on the updated guidance from the BoJ alongside a rate hike and external conditions, pointed out the bank. A deeper sell-off for United States Artificial Intelligence/tech stocks could provide support for the yen by disrupting favorable conditions for yen-funded carry trades.

MUFG expects the BoJ to indicate that further gradual rate hikes remain likely if its outlook for the economy is realized, and predicts two further 25bps hikes in 2026. However, if the next hike isn't delivered until around the middle of next year, the BoJ's policy update may fail to trigger a sustained reversal of the yen's recent weakening trend while fiscal concerns in Japan remain a heavy weight.

Ahead of the BoJ's policy meeting this week, Bloomberg has reported that the Japanese central bank is likely to start the process of winding down its holdings of ETFs as early as next month, added MUFG. The market value of ETF holdings totals around 83 trillion yen, but the pace of unwind will be very gradual, totalling 330 billion yen per year based on book value, helping to limit market disruption.

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