The Japanese yen strengthened past 138 per dollar on Friday for the first time since August 2023, surging 1.9% on the session after Bank of Japan Governor Kazuo Ueda told the Lower House Financial Affairs Committee that policy normalization "should proceed at a more deliberate but accelerating pace" given persistent above-target inflation and tightening labor markets.
The yen has now appreciated approximately 14% from its July 2024 weakness near 161 per dollar, marking one of the most sustained currency rallies in the post-pandemic era. Against the euro, the yen strengthened to 162 from a recent peak near 175, while the cross against sterling fell to 188. The Bank of Japan policy rate currently sits at 0.75% following the March hike.
Markets Price Four More Hikes
Overnight index swap markets now imply 105 basis points of cumulative BOJ tightening between today and end-2027, equivalent to four 25-basis-point hikes plus partial probability of an additional move. The pricing is a notable acceleration from earlier this month when only 70 basis points were anticipated. The terminal rate is now seen at 1.75-2.00% by Q4 2027.
Japanese Government Bond yields rose sharply on the comments. The 10-year JGB yield climbed 8 basis points to 1.84%, the highest level since 2008, while the 30-year touched 2.42%. The flatter yield curve reflects markets pricing both faster near-term tightening and the eventual end of BOJ Quantitative Tightening operations targeting the long end.
Equities Hit by Strong Yen
The Nikkei 225 fell 2.4% to 39,840, with major exporters bearing the brunt. Toyota declined 3.8%, Sony fell 2.9%, Honda dropped 4.1%, and Nintendo slid 3.4%. Conversely, domestic-demand sectors gained, with banking shares advancing on the steeper yield curve outlook — Mitsubishi UFJ Financial Group climbed 4.2%, Sumitomo Mitsui rose 3.8%, and Mizuho added 4.4%.
The strong yen complicates the calculus for the BOJ, with every 1% appreciation estimated to subtract approximately 0.05 percentage points from full-year inflation through cheaper import prices. UBS Tokyo analyst Aoki Masamichi cut his year-end USD/JPY forecast to 132 from 138, while Morgan Stanley's Tony Wang now sees the pair reaching 128 by Q1 2027. Bears warn that further BOJ tightening could trigger renewed unwinding of global yen carry trades estimated at $4.2 trillion.