USD/JPY rockets 150 points higher as JGB yields surge

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USD/JPY extended its decline leading into Japan’s inflation data release today, but in a surprising turn, the pair rebounded sharply despite figures that reinforced expectations of continued Bank of Japan (BOJ) rate hikes.

The inflation data showed:

• Core inflation (excluding fresh food): 3.2% y/y, a 19-month high.
• Core-core inflation (excluding food and energy): 2.5% y/y.
• Headline inflation: 4.0% y/y.

On the surface, this data supported the case for the BOJ to stay on its tightening path. However, after initially sliding, USD/JPY found a bottom and began to climb—a move that initially looked like a classic “buy the fact” reaction (a sharp sell-off ahead of the data, followed by a rebound once it was confirmed). But instead of stabilizing, the rally kept extending.

As this was unfolding, Japanese government bond (JGB) yields surged. The 10-year benchmark yield hit 1.455%, its highest level since 2009, while the 2-year yield climbed to its highest level since October 2008. These moves triggered official pushback, with policymakers attempting to talk yields down:

• Finance Minister Katsunobu Kato warned that rising bond yields could strain Japan’s finances due to increased debt-servicing costs.
• Prime Minister Shigeru Ishiba echoed similar concerns about the burden of higher yields.
• BOJ Governor Kazuo Ueda signaled potential bond market intervention, stating:
  “We will purchase government bonds nimbly to foster the stable formation of yields in exceptional cases where long-term yields rise sharply.”

Concerns over Japan’s rising debt burden fuelled yen weakness, sending USD/JPY surging from just under 149.30 to above 150.70 at its peak. Ueda’s comments on intervention helped cap JGB yields, which edged lower afterward, allowing USD/JPY to pull back slightly to around 150.20 as of the latest update.

If an Asia market Wrap has a “Key Takeaway” today’s is that despite strong inflation data pointing toward further BOJ rate hikes, the combination of rising bond yields and government intervention threats shifted the market’s focus. Instead of reinforcing yen strength, concerns over Japan’s fiscal strain and potential BOJ bond-buying led to renewed yen selling, fueling a sharp USD/JPY rally.

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While Japan’s bond market drama dominated the session, there were also remarks from Federal Reserve Governor Adriana Kugler and Reserve Bank of Australia (RBA) Governor Michelle Bullock, both striking a cautious tone on monetary policy.

• Kugler reinforced the Fed’s “wait and see” stance, emphasizing the need to assess factors such as the impact of tariffs and labor market conditions before making further policy decisions.
• Meanwhile, Bullock provided no clear signals on the timing of potential rate cuts in Australia, if any, maintaining a measured outlook.

This article was written by Eamonn Sheridan at www.forexlive.com.