BOJ Hike Bets Surge, USD/JPY Tumbles Below 160
The USD/JPY pair has slipped back below 160 as markets now favor two BOJ rate hikes this year, following US Treasury Secretary Scott Bessent's comments implying that Japanese authorities may be preparing further measures to counter persistent yen weakness.
Bessent, who was speaking at the G20 finance ministers meeting in North Carolina, said he had information that the market doesn't have and expected Governor Kazuo Ueda to 'do the right thing'. This comes as media reports suggest the BOJ may raise rates faster than its current twice-a-year pace.
The comments have pushed Japan's OIS curve into a significant hawkish shift, with markets now pricing around a 70% chance of a 25bp hike in September and a second move by the December meeting at roughly 75%. The front-end JGB yields have hit fresh multi-decade highs.
The BOJ's tightening cycle would normally be expected to restrain inflation and nominal growth expectations, but the lack of curve flattening raises serious questions about whether attempts to tame the back end of the JGB yield curve will be successful. This has potential global implications given Japan's standing as the second-largest sovereign bond market behind the US.