Yen's Strength Hinges on BOJ Rate Decisions Amid Global Interest Rate Hikes

Japanese funds are beginning to flow back into the country, but large-scale repatriation of overseas assets remains on hold as investors await clarity on where Japanese bond yields will peak and how far the central bank will raise interest rates.

The Bank of Japan (BOJ) raised interest rates last week, pledged to address inflation, and conducted a rate check in the foreign exchange market. However, major investors remain reluctant to increase their holdings of domestic bonds while yields continue to rise.

According to Deutsche Bank's fixed-income strategist Shoki Omori, 'short-term market participants have already unwound their carry trades, but long-term investors have not yet started to move.' He noted that the yen's prolonged decline may have come to an end, but a sustained strengthening trend has yet to begin.

The interest rate differential between Japan and other countries is unlikely to narrow significantly in the near term as almost all major central banks have begun raising interest rates to tackle inflationary pressures stemming from the war in the Middle East.