Weak yen, hawkish Fed adds to pressure on BOJ to accelerate hikes

By Junko Fujita

TOKYO, June 9 (Reuters) - Persistent weakness in the yen and an expected hawkish shift for the Federal Reserve after a hot jobs report in the U.S. are expected to add pressure on the Bank of Japan to accelerate interest-rate increases.

The Fed is likely to keep rates steady this month, the first meeting under Chair Kevin Warsh, but last week's labour data - showing a third straight month of strong job gains - increased bets for a U.S. hike by December, compared with recent expectations for a reduction.

"The firm U.S. labour data has added pressure on the BOJ for interest rate hikes," said Masayuki Koguchi, executive chief fund manager at Mitsubishi UFJ Asset Management. "There had been optimism that the yen might strengthen as U.S. rates had been expected to fall."

The yen was trading at 160.14 per dollar on Tuesday, a level that has prompted Tokyo to intervene in foreign markets. The yen first broke above 160 on April 30 and since then, Japan has spent 11.7 trillion yen ($73 billion) - a record monthly amount - to defend the currency.

The BOJ is widely expected to raise its main rate by 25 basis points to 1% at its June 15-16 meeting and a second hike sometime this year has also been well priced in.

But with the wide gap between U.S. and Japanese policy rates a key factor behind the yen's weakness, analysts are now keen to see if foreign exchange pressures will force the BOJ to adopt a more hawkish tone.

"I interpret the coming rate hike as a defensive measure intended to prevent further yen depreciation," said Shigeto Nagai, the head of Japan economics at Oxford. "The focus of the coming meeting is how the BOJ will communicate their stance regarding future interest rate hikes."

This may be the main tool Japanese authorities have at hand to counter yen weakness, even though Prime Minister Sanae Takaichi has been keen to promote economic growth through government spending and been wary of hastily pursuing interest rate normalisation.

"The gap between the one-year forward policy rates of Japan and the U.S. is expected to widen as of now. Based on this fundamental, currency intervention at this point may not be effective," added Satsuki Yuba, an economist at Daiwa Asset Management.

Swap markets on Tuesday were pricing in a 93% chance of a BOJ rate hike this month, up from expectations in May of around an 80% chance, according to data from Tokyo Tanshi, a money market broker.

Swap markets are also pricing in a 92.5% chance of another rate hike to 1.25% by December.

($1 = 160.2000 yen)

(Reporting by Junko Fujita in Tokyo; Editing by Rocky Swift and Edwina Gibbs)