The Japanese yen strengthened 1.4% to 144.80 per dollar in Sunday trading, the strongest level since early February, after the Bank of Japan's preliminary Tankan business sentiment survey delivered the strongest reading in 18 months. Overnight index swap markets now imply a 71% probability of a 25 basis point BOJ rate hike at the June 17–18 meeting, up from 38% at the start of the past week.
Japanese 10-year government bond yields rose 6 basis points to 1.42%, while the Topix banking sub-index gained 3.6% in early Asia trading. Mitsubishi UFJ Financial Group (MUFG) advanced 4.2%, Sumitomo Mitsui (SMFG) rose 3.8%, and Mizuho (MFG) added 4.1% — all on expectations of net interest margin expansion under a higher policy rate regime.
Tankan Components Show Broad Strength
The headline large manufacturer business condition diffusion index printed at +18, the highest reading since October 2024 and well above consensus of +12. The non-manufacturer reading came in at +24, also a multi-year high. Capital expenditure intentions among large firms accelerated to 8.4% year-on-year planned growth, up from 5.9% in the prior survey.
BOJ Governor Kazuo Ueda is scheduled to address the BOJ's annual policy conference Tuesday in Tokyo. Markets will scrutinise his framing of inflation expectations, particularly given that core CPI excluding food and energy printed at 1.9% year-on-year for March, hovering near the 2.0% sustainable target.
Carry Trade Unwind Risks
Citigroup FX strategist Osamu Takashima estimated outstanding short-yen carry positions at approximately $312 billion, up from $245 billion at the August 2024 unwind episode. A surprise BOJ move could trigger a similar dislocation event, with USD/JPY potentially testing 138 within 72 hours of an unscheduled rate decision. Goldman Sachs flagged the 142–138 range as the medium-term technical target.
Japanese equity markets were mixed. The Nikkei 225 futures gained 0.3% as bank rallies offset weakness in exporters, with Toyota (