Japanese Yen: JGB spillover supports firmer JPY against US Dollar – OCBC

OCBC’s Sim Moh Siong and Christopher Wong highlight that rising long-end Japanese government bond yields are increasingly influencing global curves and the Japanese Yen. Markets now price a high probability of a September BoJ rate hike, but policymakers’ appetite for further tightening is uncertain. The strategists keep their end-2026 USD/JPY target at 163, turning more constructive only if BoJ signals a more aggressive hiking path.

BoJ path and JGB yields in focus

"Part of the rise in long-end yields, particularly in the US, reflects higher real yields driven by persistent fiscal deficits and increasing AI-related corporate financing needs. However, these factors do not fully explain the move."

"Another factor that should not be overlooked is the spillover from rising long-end Japanese government bond (JGB) yields. Concerns over JPY weakness and perceptions that the BoJ remains behind the curve have not been fully alleviated despite coordinated Japan-US FX intervention and growing debate over a faster pace of BoJ rate hikes."

"Markets are increasingly pricing in a September BoJ rate hike, with implied odds rising to around 80% from 50% at the start of August. If the BoJ accelerates policy normalisation and the JPY sheds its status as a low-yielding funding currency, the currency should strengthen over time."

"Quarterly rate hikes through 2027 would be a key catalyst for a more durable JPY appreciation. However, it remains unclear how much appetite policymakers have for additional tightening beyond September or October."

"We maintain our end-2026 USD/JPY target of 163 but could become more constructive on the JPY if the BoJ signals a more aggressive rate hiking path or if Japan actively encourages capital repatriation, including through institutions such as the GPIF."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)