USD/JPY dropped below 155 as a weaker dollar and lower US yields provided support, while markets anticipate a potential BoJ rate hike. Governor Ueda reiterated that current policy is accommodative, though uncertainty over the neutral rate keeps markets cautious, MUFG's FX analyst Lee Hardman reports.

BoJ rate hike expectations support Yen

"The weaker US dollar and drop in US yields has helped to lower USD/JPY back below the 155.00-level overnight. Japanese policymakers will be hoping that building market expectations for a Fed rate cut alongside the BoJ resuming rate hikes this month will provide more support for the yen, and bring an end to the sharp yen weakening trend that has been in place since early October."

"Market expectations for a BoJ rate hike this month were fuelled by the hawkish signal from Governor Ueda at the start of this week. Those expectations have been supported as well by the a Reuters report overnight stating that the BoJ is likely to raise rates this month with the government expected to tolerate such a decision according to three government sources familiar with the deliberations."

"Governor Ueda spoke again overnight in parliament and put forward the view that the current policy rate remains accommodative. However, he was less clear over where the neutral policy rate in Japan. He stated 'unfortunately, it remains a concept that can only be estimated within a fairly wide range at present. We don’t know where it lies, but how much interest rates, nominal ones, will ultimately rise and how much will be appropriate will depend on that'."