BOJ Rate Hike Fails to Spark Sustained Yen Rally as Repatriation Lags

The repatriation of Japanese capital from abroad has begun, but it's being held back by uncertainty over Japanese bond yields and interest rates. The Bank of Japan's rate hike last week, along with its pledge to tackle inflation, may have warded off another wave of speculative bets against the yen.

However, major investors remain reluctant to commit heavily to domestic bonds due to climbing yields and a lack of clarity from policymakers on how much further rates must rise. Two dovish dissenting votes at last week's meeting and a further selloff in bonds this week have reinforced this uncertainty.

A key concern is that the Japanese government's $1.8 trillion Government Pension Investment Fund has not yet made significant changes to its allocation, which could spook other investors. 'Nobody wants to catch the falling knife,' said Shoki Omori, fixed income strategist at Deutsche Bank in Tokyo.