Yen Advances as Investors Assess Rate Outlooks for Japan, US

(Bloomberg) — The yen strengthened for the first time in eight days as investors weighed the outlook for interest rates in Japan and the US.

Most Read from Bloomberg

The Japanese currency gained as much as 0.7% to 150.27 per advancing from its weakest level since November at 151.82 reached on Wednesday. The yen’s rebound came amid a broad decline in the dollar after the Federal Reserve maintained its outlook for three interests rate cuts this year and Chair Jerome Powell said it would be appropriate to dial back policy restraint.

The dollar-yen fluctuated overnight, partly after a Nikkei report said investors were speculating that the BOJ would hike rates in July or October. Investors also think the central bank may be forced to act sooner rather than later, as the yen weakened following the BOJ’s policy announcement, the Nikkei said.

Swap markets indicate about a 51% chance of a hike by the July meeting, with an implied rate of around 0.12%. The probability climbs to 140% by the October gathering, with an implied rate of around 0.21%.

The mood was buoyant in Japanese financial markets as they reopened Thursday from a public holiday, with onshore investors getting their first full trading day to respond to the BOJ ending the world’s last negative interest rate on Tuesday, the nation’s first rate increase since 2007. The BOJ’s new policy rate is 0% to 0.1%.

After the announcement, Governor Kazuo Ueda emphasized at a press conference that even with the end of the negative rate, it’s important that financial conditions remain accommodative, keeping debate open for what the next move would be.

“The market initially assessed Governor Ueda’s comments as dovish because he made it unclear when the next rate hike would come, but his comments suggested the BOJ sees another hike as an option but does not know when,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities Co. “In addition, the dollar selloffs post-Fed decision also continues” supporting the yen’s rebound, he added.

By moving in March instead of the long-held consensus view of April, Ueda secured more space to raise borrowing costs again in 2024 if data supports the case.

“Overall, we didn’t think the press conference was particularly dovish,” Bank of America economists including Izumi Devalier and Takayasu Kudo wrote in note dated Tuesday. “Instead, we got a strong impression that, in its base case, the BOJ had in mind further policy normalization, albeit at a gradual pace.” The US bank maintains its prediction that the BOJ will deliver an additional hike to 0.25% in October and another to 0.5% in April 2025.

Ueda on Thursday said in parliament that there was a risk of the bank having to undertake a series of rapid rate hikes if authorities had waited too long to completely confirm the stable inflation target will be achieved. The bank will continue to firmly support the economy and inflation with accommodative financial conditions for the time being, he added.

The yen’s decline on Wednesday to this year’s weak point triggered jawboning from officials in Tokyo.

Finance Minister Shunichi Suzuki reiterated on that authorities are watching foreign-exchange moves with high sense of urgency and said it is important that currency moves stably. Chief Cabinet Secretary Yoshimasa Hayashi repeated Suzuki’s remarks.

–With assistance from Saburo Funabiki.