JPY Bolstered by Rising JGB Yields and September Rate Hike Expectations

The Japanese Yen (JPY) has been influenced by rising long-end Japanese government bond (JGB) yields, which are increasingly affecting global curves.

Rising JGB yields have led markets to price in a high probability of a September Bank of Japan (BoJ) rate hike, with implied odds rising to around 80% from 50% at the start of August.

This has sparked concerns over JPY weakness and perceptions that the BoJ remains behind the curve. However, coordinated Japan-US FX intervention and growing debate over a faster pace of BoJ rate hikes have not fully alleviated these concerns.

The strategists at OCBC believe that if the BoJ accelerates policy normalization and the JPY sheds its status as a low-yielding funding currency, the currency should strengthen over time. Quarterly rate hikes through 2027 would be a key catalyst for a more durable JPY appreciation.