Yen strengthens past ¥150 against dollar on BoJ rate rise expectations

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The yen briefly strengthened past the level of ¥150 against the US dollar on Friday, as hotter than expected inflation readings fuelled more bets that the Bank of Japan will raise interest rates in December.

After rising through the week, the yen touched ¥149.86 against the dollar in the morning, in a surge that traders said was partly due to thin trading volumes around the US Thanksgiving holiday.

The yen has rallied by about 3 per cent this week, making it one of the best performing of the G10 group of most heavily traded currencies.

The strengthening came after stronger than expected consumer price index numbers in Tokyo, an important constituent of the economic data on which the BoJ bases its forecasts. 

The Tokyo core CPI, which excludes fresh food, rose 2.2 per cent from the previous year. The rise was fuelled by more expensive rice, which has been in short supply this year due a weak harvest and long-term farming policies.

The rising cost of rice is being passed on to consumers through everyday items, including bento lunch boxes and onigiri rice balls, said Tomohiro Ota, Japan economist at Goldman Sachs.

Despite the yen’s decline through November, the swaps market has been pricing in a greater likelihood that the BoJ will raise interest rates in December. Swap contracts are pricing in about a 60 per cent chance of a rate increase.

The yen’s steady weakening through November was driven in part by the so-called “Trump trade” as investors bet on a stronger dollar and increased market confidence that the US Federal Reserve will cut rates in December.

In mid-November, the yen fell below ¥156 against the dollar, resulting in a round of verbal intervention by the Japanese authorities and sparking speculation that the new government of Prime Minister Shigeru Ishiba might be forced to more directly defend the currency. The government has deployed over $100bn in actual intervention this year.

Yujiro Goto, a currency strategist at Nomura, said that while bets against the yen had built up after the US election, many of those positions had been unwound ahead of Thanksgiving.

But if the pace of yen appreciation were now too rapid, that could prevent the BoJ from opting for a rate increase in December, Goto said. He added that the BoJ might be reluctant to raise rates if the yen strengthened to ¥146 against the dollar.