Yen soars as Bank of Japan tipped to raise interest rates

The Japanese yen experienced a significant surge, reaching its highest level against the dollar in a month, at 155.85, due to expectations of an interest rate hike by the Bank of Japan (BoJ). This jump occurred on Thursday and followed a 0.9% increase the previous day. The sharp movement was triggered by concerns over a fresh inflation increase due to rising oil prices, which led to a global government bond sell-off.

Bank of Japan policymaker Hajime Takata's suggestion that the central bank needs to be more "nimble" fueled speculation of a decisive move. Nigel Green, CEO of financial adviser deVere, noted that the rapid yen appreciation highlighted the fragile market state, emphasizing that rumors could significantly impact markets. Citi indicated that the BoJ's remarks reinforced the notion of an accelerated rate hike trajectory.

The BoJ has been gradually raising rates over the past two years, after the economy overcame decades of deflation. Currently, there is a 77% probability of a rate increase at the BoJ's upcoming meeting on September 17. Japan's vice-finance minister for international affairs, Atsushi Mimura, expressed neither satisfaction nor reassurance, stating that policymakers remain vigilant.

The bond market sell-off intensified due to comments by US Federal Reserve Chair Kevin Warsh, who signaled a commitment to bring inflation back to the 2% target. Warsh had previously abandoned forward guidance, stating that if inflation did not move towards the target, the Fed would take further action. The market sell-off seemed to ease by Thursday, with yields on 10-year UK government bonds (gilts) hovering around 5.1%, having peaked near 5.3% earlier in the week.