BUZZ-COMMENT-Yen gathers support from shifting BOJ expectations

Bank of Japan efforts to combat inflation and concerns over global tariffs will strengthen the yen.

On Wednesday, the yen surged following strong Japanese wage data, PMIs, and earnings, which pushed the 2-year JGB yield to its highest point since 2008 while flattening of the yield curve. Market expectations for a BOJ rate hike in July now exceed 50%, with options bets increasing for an earlier hike as annual wage talks get underway.

The shift follows comments from BOJ Governor Ueda last week, emphasizing that the policy's goal is to achieve sustainable 2% inflation. Ueda has intentionally kept policy accommodative to create a virtuous cycle of rising asset prices and wages. With corporate earnings booming, wages increasing, and the consumer price index climbing at a 3.6% annual rate, it appears that the virtuous cycle may finally be materializing.

Additionally, the yen—traditionally a haven—stands to benefit from the uncertainty surrounding global tariffs. On Tuesday, demand for yen call options surged, particularly for dates after the U.S. tariff pause with Canada and Mexico ends.

The increased appetite for yen, especially against currencies where rate cuts are anticipated, has driven USD/JPY out of its 154-158 range, reaching levels not seen since the December Fed and BOJ meetings. Falling Treasury yields after a soft U.S. ISM services report has the pair sliding below 200-day and 100-day moving averages at 152.73-80. The key 152 pivot level from November 2023 offers support ahead of the 151.53 38.2% retracement level of its September to January advance.

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