Asset Management One, a major asset manager under Mizuho Financial Group, stated that the market is underestimating the Bank of Japan's resolve to tighten policy, and the yen will break through the 150 mark after the BOJ hikes rates in April. The company's Chief Investment Officer, Shigeki Muramatsu, said in an interview that speculation that the BOJ would find it difficult to raise interest rates under the current administration has fueled yen weakness, but the reality may be different. Recent remarks from US Treasury Secretary Bessent, who urged Japan to allow the central bank to hike rates further to combat inflation, took the market by surprise. Muramatsu believes that this explicit pressure from the US increases the likelihood of an earlier rate hike by the BOJ. He stated, "When Bessent goes to such lengths, it's hard to imagine Japan not bringing him a little 'souvenir'." Market pricing currently indicates about a 69% probability of a BOJ rate hike before April, significantly higher than the roughly 40% chance seen at the end of last year. Last week, the yen briefly strengthened to a three-month high of 152.10, amid market speculation that Japan might intervene to support the currency.
The unexpected pressure from the US is altering market expectations. News last month that the New York Fed conducted a currency check caught many investors off guard. As an agent for the US Treasury, this move suggested that Washington appears to be aligning with Japan's efforts to curb yen weakness, despite a long-standing US reluctance to engage in currency intervention. "I was quite surprised by this move. I didn't expect the Fed to join in," Muramatsu said. This apparent coordination increases the possibility of the BOJ moving sooner on rate hikes. Market concerns about the BOJ's policy stance stem from its slow pace of monetary tightening. Earlier this year, these concerns pushed the yen close to the multi-decade lows it touched in 2024. However, a sudden reversal in the currency's trend last month signals a shift in market sentiment. Money market pricing reflects a significant shift in expectations. The probability of a hike before April has jumped to around 69% from approximately 40% at the end of last year, a change that coincides with the US Treasury Secretary's public comments. US Treasury Secretary Bessent's clear urging for Japan to permit further BOJ rate hikes to fight inflation provides external support for the central bank's policy space. Muramatsu argues that this pressure from the US actually creates more favorable conditions for a BOJ rate hike.
Ultra-long-term Japanese government bonds remain attractive. Asset Management One is also bullish on ultra-long-term Japanese Government Bonds (JGBs), even though this segment of the market was the epicenter of last month's bond market turbulence. Muramatsu stated that yields are at high levels relative to Japan's growth prospects. The yield on 30-year JGBs has stabilized around 1.64% after surging last month. He pointed out that despite Japan's low trend growth rate, the yields on these bonds are higher than those on comparable German bonds. Muramatsu noted that foreign investors appeared to sell 30-year bonds during a period of heightened pre-election calls for tax cuts. "But there has been a lot of communication since then, and the market seems to have softened its stance," he said. Japanese Prime Minister Takaichi Sanae has announced a snap election for February 8th, having previously called for tax reductions. He suggested that unless the scale of tax cuts exceeds the government's current pledge of a two-year food tax break, these bonds should remain stable. Muramatsu warned that a strengthening of the yen beyond 150 against the US dollar could put pressure on Japanese equities. However, he added that Asset Management One remains optimistic about the long-term prospects for Japanese stocks, as households are likely to increase their investment in risk assets. This cautious view reflects the potential impact of a stronger yen on the earnings of export-oriented companies. A firmer yen typically diminishes the overseas income of Japanese exporters, thereby affecting corporate profits and share price performance.
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