Yen Strengthens as Market Hopes for Larger Bank of Japan Rate Hikes

The Japanese yen continues to be the top performer in G10, with pricing for Bank of Japan rate hikes building in the aftermath of policy board member Hajime Takata's speech hinting at a larger hike than expected.

Market expectations have jumped to 30bps of tightening for this month's meeting and year-ahead pricing is now close to 100bps. However, MUFG Research believes that while a hike this month will confirm a pick-up in pace from every six months to every three months, it's unlikely the BoJ will hike by more than 25bps.

Further speculation that the US is pressuring Japan to act more forcefully adds to the uncertainty. The recent EUR/JPY selling intervention and comments from US officials suggest a possible shift in policy, but MUFG Research remains cautious on this front.