The yen surged to its highest level in a month, accompanied by gains in Japanese bank shares, following upbeat wage data and remarks from a Bank of Japan (BOJ) board member, which heightened expectations of an interest rate increase later this month. The rise in Japanese government bonds continued as an auction of 30-year debt revealed weak investor demand for long-maturity securities, signaling anticipation of the BOJ’s policy shift.
The yield on policy-sensitive two-year notes also climbed to 0.195%, reaching its highest level since 2011. Volatile overnight indexed swaps indicate a 79% probability of a rate hike in March, significantly up from about 26% at the end of the previous month.
Yen Strengthens as Bank Stocks Rally on Wage Growth and BOJ Rate Hike Speculation
Recent data showed that Japanese wage growth accelerated at the fastest pace since June, a development closely monitored by the BOJ to assess its impact on inflation. Several government officials reportedly favor a rate hike in the near future, while BOJ board member Junko Nakagawa affirmed that the nation’s economy is steadily progressing towards the central bank’s 2% price target.
Amidst these developments, the yen advanced by as much as 0.7% against the dollar, while the benchmark 10-year bond yield rose by 2.5 basis points to 0.735%. Interestingly, despite hedge funds increasing their short positions on the Japanese currency to the most bearish levels in over six years, the yen continued its rally.
Takeshi Ishida, a strategist at Resona Holdings Inc. in Tokyo, noted, “Everything is pointing to yen buying,” highlighting the potential for unwinding excessive yen volatility and short positions.
Japanese bank shares also benefited from speculation of higher interest rates, with the Topix banks index rising for a third consecutive day, surging by as much as 2.5%. This contrasted with the performance of the blue-chip Nikkei 225 gauge, which declined by up to 1.1%.
