The Japanese yen has surged by more than 2% against the US dollar, reaching its highest level in a month, driven by growing speculation that the Bank of Japan (BoJ) is poised to raise interest rates. This significant jump occurs as global markets remain unsettled following a dramatic government bond sell-off earlier this week, sparked by fears of renewed inflation due to higher oil prices.
Investors worldwide are actively re-evaluating their expectations for the future trajectory of interest rates, both within Japan and across other major economies. The prospect of a decisive move by the BoJ was notably heightened by recent remarks from policymaker Hajime Takata, who suggested the central bank needs to act more “nimbly.”
Nigel Green, chief executive of financial adviser deVere, commented on the rapid appreciation of the yen, stating, “Markets this jumpy don’t need a shock to move hard, a rumour is enough.” Echoing this sentiment, Citi noted in a client brief that Takata's comments represented the “strongest messaging we’ve heard from the board and reintroduces the idea of an expedited rate hike trajectory.”
Despite incrementally raising rates over the past two years as Japan's economy emerged from decades of deflation, the BoJ's main policy rate was maintained at 1% in July. However, market sentiment now indicates a 77% probability of a rate increase at the central bank's next meeting, scheduled to commence on September 17.
The global bond market sell-off, which has pushed up yields on government borrowing, intensified earlier this week. This was partly fueled by US Federal Reserve chair Kevin Warsh, who, in a speech last Friday at the central bankers’ conference in Jackson Hole, signaled his determination to bring inflation back to target. Warsh, who had previously confused some investors by discontinuing the Fed's “forward guidance” on future rate moves, stated that if inflation did not trend towards the 2% target, the Fed would have “more to do.”
The dollar experienced further weakening on Thursday after Fed governor Christopher Waller indicated he was inclined to keep interest rates steady at the upcoming meeting of Fed rate-setters this month. Waller told Reuters, “I’m going to paraphrase John Lennon here: ‘give disinflation a chance’. We can wait one meeting.” Following his comments, the dollar dropped further against the yen and also weakened against the pound and the euro.
By Thursday, the bond sell-off appeared to have eased, with yields on 10-year UK government bonds, known as gilts, stabilizing at approximately 5.1% in morning trading. This comes after they had touched their highest level since 2008, close to 5.3%, earlier in the week.
