The Japanese yen strengthened sharply past 148 per U.S. dollar on Friday — its strongest level in nine weeks — after Bank of Japan Deputy Governor Shinichi Uchida delivered the clearest hawkish signal since Japan exited its yield-curve-control regime two years ago. Uchida told the Japan Research Institute that "if inflation and wage dynamics continue on their current trajectory, an additional policy adjustment at the May 22-23 meeting is a live option."
The yen rallied 1.8% on the session as traders priced the probability of a 25-basis-point hike at the May meeting at 58%, up from 34% before the speech. Japanese 10-year JGB yields spiked 7 basis points to 1.42%, the highest since 2011, while the 2-year yield surged 11 basis points to 0.88%. The Nikkei 225 fell 0.8% to 41,284 on the stronger currency.
Wage-Price Spiral Finally Materializes
Japan's annual spring wage negotiations, known as shunto, produced a 5.2% wage increase — the highest since 1991. Core-core inflation excluding fresh food and energy rose to 2.4% year-over-year in March, well above the BoJ's 2% target and the highest reading in 32 years. The Tokyo CPI released Friday showed April core inflation accelerating to 2.7%, suggesting nationwide numbers will follow higher.
Governor Kazuo Ueda had signaled at the April policy meeting that the Bank was approaching a phase where the real policy rate — currently negative 2.2% when adjusted for core inflation — was "inconsistent with sustainable price stability." Ueda is scheduled to deliver a major speech at Keidanren on Wednesday, which markets will parse for confirmation of the May hike timing.
Carry Trade Unwind Accelerates
CFTC data showed speculative yen short positions dropped by 82,000 contracts in the latest reporting week, the largest covering short-squeeze since the August 2024 episode. The unwinding of the yen carry trade — widely blamed for the August 2024 global flash crash — is proceeding in a more orderly fashion this time, with emerging-market carry pairs still absorbing the impact.
Nomura's head of FX strategy Yujiro Goto raised his yen forecast to 138 per dollar by year-end 2026, from a prior 146. JPMorgan and Morgan Stanley both see 140 as a reasonable Q4 target. The yen's strength is helping to compress Japan's energy import bill, offsetting some of the damage from Iran-driven oil price inflation.