BOJ Expectations Fuel Yen Recovery Amid Dollar Stability

The Japanese yen has seen a notable recovery over the last two trading sessions, with USD/JPY declining by nearly 1.00%. This shift is largely attributed to growing expectations that the Bank of Japan could accelerate interest rate hikes.

Expectations surrounding the BOJ have changed significantly in recent weeks, driven by comments from Kazuo Ueda emphasizing that inflation is moving closer to the bank's 2.00% target. Several policymakers have suggested a rate hike at the September meeting could be justified, and further adjustments may be necessary in the months ahead.

This development has led markets to assign more than an 80% probability to at least a 0.25% rate increase at the next meeting. The shift in tone from the BOJ is already being reflected in the Japanese bond market, with 10-year government bond yields showing a consistent recovery and trading above 3.00%.

However, it's essential to note that this is occurring alongside rising U.S. Treasury yields, which have climbed above 4.8%. This could limit part of the yen's recent advance, as the favorable differential for the dollar remains in place.