BoJ Tightening Could Send Yen Soaring Against US Dollar

The Bank of Japan's (BoJ) potential policy tightening could strengthen the Japanese yen against major peers, particularly the US dollar. According to a note from BNY, the market may be underpricing the possibility of further rate hikes by the BoJ.

As of early 2025, the central bank has signaled a gradual move away from its ultra-loose monetary policy, which has historically weakened the yen. Any acceleration in this tightening cycle could make the yen more attractive to investors and potentially lead to appreciation against other currencies.

The BoJ's cautious approach to further hikes emphasizes data dependence, but BNY warns that market expectations may not fully capture the risks of a more aggressive tightening cycle. The note advises monitoring BoJ communications and economic data, especially wage growth and inflation figures, which are key drivers of policy decisions.