The Japanese Yen (JPY) is outperforming all G10 currencies as markets revive expectations of a December BoJ rate hike, driven by domestic pressures and growing calls to tackle inflation, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

JPY rebounds on renewed December rate hike expectations

"The yen is outperforming all of the G10 currencies and entering Tuesday’s NA session with a 0.3% gain vs. the USD as it tentatively extends its recovery from last week’s 10 month low. Domestic developments are dominating and a December BoJ hike appears to be back in play following a recent slide in which market participants had pushed out their expectations to Q1 2026, anticipating a hike at either of the January or March meetings."

"Market participants appear to be responding to a high profile message from the head of Japan’s largest labor union calling on PM Takaichi’s government to step up its efforts to fight inflation. Short terms rates markets have added about 5bpts to their pricing for December, which now stands at 9bpts – implying a ~36% chance of a hike."

"US-Japan spreads are under renewed pressure and their divergence from the yen is extending, leaving the currency well below levels implied by fundamentals."