BoJ Rate Hike Expectations Boost Japanese Yen

The Japanese yen strengthened modestly overnight after the Prime Minister's government expressed support for a near-term Bank of Japan (BoJ) interest rate hike. This move is expected to happen in either September or October, according to people familiar with the matter.

A Bloomberg report stated that the BoJ and the government are aligning their views on the need for a near-term hike due to concerns over yen weakness driving up prices and the government's desire to strengthen the impact of recent US-Japan currency intervention. This is in line with MUFG Research's initial view that there was likely an agreement to allow the BoJ to continue normalizing policy in exchange for US support for the yen.

However, despite this strengthening, the yen has quickly given back intervention-driven gains over the past week. The 2-year Japanese government bond (JGB) yield has increased by around 15bps since intervention to support the yen at the end of July.