The yen advanced Friday after the Bank of Japan raised interest rates for the first time since July and Governor Kazuo Ueda left options open for the timing of the next hike.
The Japanese currency strengthened by as much as 0.8% to 154.85 against the dollar as Ueda said the likelihood of realizing the BOJ’s economic outlook is rising. Government bonds fell, with policy-sensitive two-year and five-year yields touching their highest since 2008 at one point. The Topix and Nikkei share indexes erased gains.
The widely expected rate hike helps to narrow the wide interest-rate between the Japan and the US, which has weighed on the yen. Some further improvement in this key market metric appears likely later this year, given the BOJ raised most of its inflation projections, with six of them now 2% or more.
The BOJ’s rate hike is its third in less than a year, and takes the policy rate to its highest since 2008. The focus now is on the timing of the BOJ’s next hike, with overnight index swaps showing about a 68% chance of another move by the July meeting, and 100% by the October gathering.
Other key factors for the BOJ include whether wages rise to levels that help consumers withstand inflation, and the future course of US President Donald Trump’s threatened tariffs.
The next hike may come as early as July, depending on the outcome of the spring labor wage negotiations, said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities. Her main scenario, however, remains October.
Yen Risks
Still, some warn that a gradual hike pace from the BOJ won’t be enough to stop the yen’s recent weakness. A sharp drop in the currency may prompt Japan to step in to prop up the yen, with Minister of Finance Katsunobu Kato recently warning that authorities will take appropriate action against excessive moves.
“The yen could go back towards the 158 level, as the BOJ left its options open,” said Shoki Omori, chief global desk strategist at Mizuho Securities. “As long as the Fed keeps its stance, dollar-yen will go up again.”
