BoJ Hawks Raise Hike Risk as Takata Open to 50-75 bps Move

The Japanese Yen has been supported by hawkish comments from the Bank of Japan (BoJ), led by Takata Hajime, who left the door open for a 50-75 bps hike on September 18 and back-to-back rate hikes. This has raised the risk of a jumbo hike, which could anchor inflation expectations, cap long-end yields, and ultimately support the JPY.

Takata's comments were echoed by Governor Kazuo Ueda, who reiterated the need to pay greater attention than before to upside risks to inflation. A jumbo BoJ hike at the next meeting is now a real possibility, as inflation expectations account for most of the rise in 10-year JGB yields.

The swaps curve currently price in just 5% odds of a 50bps hike on September 18, but the market may be underestimating the risk of a jumbo move. A forceful BoJ decision could cap the long end of the yield curve by anchoring inflation expectations and supporting the JPY.

The USD/JPY is currently testing psychological resistance at 160.00, but if a jumbo hike is implemented, it could have significant implications for the currency pair and the overall market.