Yen climbs with bond yields after Bank of Japan Governor Kazuo Ueda remarks on negative rates

The yen strengthened as much as 0.8 percent to 146.67 per dollar in early Asia trading Monday before trading 0.6 percent higher at 147.00 as of 10:18 am in Tokyo. Japan’s benchmark bond yield rose 4.5 basis points to 0.695 percent, the highest level since 2014. That helped push up the Topix banks index as much as 3.7 percent to its peak level since August 2008.

“We expect the end to negative interest rate policy in the first three months of 2024,” said Takeshi Ishida, currency strategist in Tokyo at Resona Bank Ltd. “Ueda may have started to encourage the market to price in such a scenario.”

Still, with US 10-year Treasury yields above 4%, it will be difficult for the dollar-yen to test its downside with just speculation of a policy tweak, he said.

The yawning interest-rate gap between Japan and the US has been a key factor in yen weakness, making the higher-yielding dollar more appealing. The US Treasury 10-year yield offers about 360 basis points more than Japan’s equivalent bonds. The Japanese currency has slumped almost 11 percent this year and is close to a more than three-decade low and levels at which officials last stepped in to prop it up.

“Governor Ueda seems to have made those comments in consideration of the recent depreciation in the yen,” said Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Kokusai Asset Management Co. “The BOJ will probably abolish the yield-curve control this year, but not everyone is convinced that it will end the negative interest rate policy so soon.”

Japanese officials have said this month they won’t rule out any measures to address excessive moves, signaling they are ready to intervene in the currency market if needed, but some in the market are skeptical about whether the authorities will take action now.

“The speed of the yen’s depreciation has been slower than last year and is not considered a ‘speculative move’, making it hard to conduct yen-buying intervention,” Naomi Muguruma, chief fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo, wrote in a note. “Ueda’s hawkish comments may be intended to keep yen depreciation in check.”

“Wage growth remains weak and weakening,” wrote Commonwealth Bank of Australia’s Joseph Capurso and Kristina Clifton in a currency strategy note. “We expect dollar-yen’s upside momentum to resume later this week.”