The expectation of a rate hike by the Bank of Japan has significantly increased, and the yen is expected to rise against the US dollar for the fourth consecutive week.

The yen is expected to continue to rise against the US dollar for a fourth consecutive week. The strong weekly increase in strength, which is rare for the yen that has been depreciating in recent years, indicates that the Bank of Japan is likely to raise interest rates again this year, according to data released by the Japanese government on Friday. The recent risk aversion sentiment in the financial markets has also led to a surge in global funds flowing into the yen and gold, while the US dollar, another safe haven currency, has faced selling pressure. This is primarily due to the uncertainty surrounding Trump's tariffs and the fact that the dollar is at a high level. After a significant drop over the weekend, the yen saw a significant rebound on Monday due to safe-haven demand, as the threat of Trump's tariffs caused the yen to strengthen against the dollar. Subsequently, Trump announced a delay in imposing tariffs on Canada and the US, causing the dollar to weaken significantly, leading to further strength in the yen. Data released on Wednesday showed that wage growth in Japan recorded its largest increase in nearly thirty years, further driving the yen's rise. On Thursday, a hawkish official from the Bank of Japan stated that by the end of March 2026, lending costs should at least double to 1%, further pushing the yen higher against all currencies. Regarding the safe-haven sovereign currency yen, foreign exchange market strategists generally point out that given the recent rate hike measures by the Bank of Japan and the hawkish bias in its future monetary policy path, while major central banks such as the Federal Reserve, European Central Bank, and Bank of England are moving towards an easing path, the yen still has room to rise this year. This should help significantly narrow the yield gap between Japanese government bonds and those of other major countries. The yen continued to rise against the dollar on Friday, with the commonly used measure of the dollar against the yen falling to 150.96, the lowest level against the dollar since December 10th, indicating a further appreciation of the yen. It later fell to 151.53 at 12:15 pm Tokyo time. The yen-dollar exchange rate has risen by more than 2% this week, marking the largest increase since late November last year. "The hawkish remarks from Bank of Japan officials regarding domestic policy rates have sparked market enthusiasm for going long on the yen," said Jerry Minier, co-head of G10 FX trading at Barclays Bank in London. "We believe this is more driven by the yen rather than the dollar, as there has been a significant increase in client interest in buying yen against other currencies." The strength of the yen has also benefited from investors trimming their long dollar positions. With US Treasury yields falling across various maturities and Trump's decision to delay imposing tariffs on Canada and Mexico, the dollar has given back its overall gains earlier this week. Foreign exchange traders expect some volatility in the market as they approach with caution the results of the highly anticipated meeting between Japanese Prime Minister Shizo Abe and US President on Friday. The market is highly alert to any comments regarding tariffs or a weaker yen. In addition, the market is also focused on the US non-farm payroll report. Strong economic data Surprisingly strong economic data from Japan this week has led to speculation that the Bank of Japan may raise interest rates faster and to a greater extent this year than traders previously expected. In addition to December wage data, household spending growth was five times higher than economists' expectations, marking the largest increase since August 2022. Even though the dollar/yen benchmark fell below the 150 level, some strategists suggest that the yen's further upside may be limited. Japanese retail investors' desire for overseas stocks and Japan's predicted negative real interest rates are expected to continue to put pressure on the yen exchange rate. However, despite the short-term downside risks for the dollar against the yen, Barclays strategists Shinichiro Kadota and Lhamsuren Sharavdemberel wrote in a report, "We do not expect the dollar to yen to sustain significant declines unless there is a significant risk aversion sentiment, as Japan's capital outflow trend continues to put pressure on the yen exchange rate." Nevertheless, financial market traders are still betting on the Bank of Japan raising interest rates again. Overnight index swap pricing shows a significantly higher probability, with an 80% chance that the Bank of Japan will raise interest rates before July, and a 100% chance before September. There are also bets that the central bank will raise rates more than twice this year, which is seen as positive news for the yen. These bets have the support of the most hawkish members of the Bank of Japan, Naoki Tamura and former governor Haruhiko Kuroda. Tamura hinted in a speech on Thursday that the Bank of Japan would raise interest rates shortly after further, while former governor Kuroda stated that Japan has "completely" ended deflation, making it only natural for the Bank of Japan to continue normalizing its monetary policy. On Tuesday, former Bank of Japan Executive Board member Hideo Hayakawa also stated in a media interview that the consensus in the financial markets that the Bank of Japan will stop at 1% for interest rates is "wrong."