MUFG Says Weak Yen Keeps Bank of Japan Rate Hikes, Japanese Fiscal Risks in Focus

06:22 AM EST, 01/05/2026 (MT Newswires) -- The sell-off in the Japanese government bond (JGB) market has restarted at the start of this week with the 10-year yield hitting a fresh high overnight Sunday at 2.13%, said MUFG.

It has now risen by around 45bps-50bps over the last couple of months, wrote the bank in a note to clients.

The sharp ongoing sell-off continues to reflect concerns over fiscal risks in Japan under Prime Minister Sanae Takaichi, and the hawkish repricing of Bank of Japan rate hike expectations, stated MUFG.

Over the same period the two-year JGB yield has increased by around 25bps-30bps, which is more closely linked to BoJ rate hike expectations, pointed out the bank. It has jumped higher by almost 10bps over the last couple of trading days as market participants move to price in more active tightening from the BoJ.

The Japanese rate market is more fully pricing in two further 25bps hikes from the BoJ in 2026 with the next hike expected in June or July, added MUFG. The weak yen (JPY) and loose fiscal policy will put more pressure on the BoJ to raise rates further this year.

The hawkish repricing of BoJ rate hike expectations was encouraged by comments from Governor Kazuo Ueda overnight Sunday, noted the bank. The governor used his first public appearance this year to reiterate that "we will keep raising rates in line with the improvement in the economy and inflation" adding that "the appropriate adjustment of monetary easing will lead to the achievement of stable inflation target and longer-term economic growth." The governor expects the "mechanism between moderate wage growth and inflation is likely to be maintained."

The weak yen will keep pressure on both the BoJ to hike rates sooner and the government to consider intervening directly in the currency market to provide support for the yen, according to MUFG. One positive for Japan has been that USD/JPY has been consolidating at higher levels between 155.00 and 158.00 over the last couple of months.

The risk of intervention would step up if USD/JPY regains upward momentum and retests last year's highs at 158.87, noted the bank. The sell-off at the long-end of the JGB curve also highlights that the government needs to take action to restore confidence in its commitment to fiscal discipline, which would help ease yen-selling pressure as well.

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