Bank of Japan (BoJ) Governor Kazuo Ueda opened the year reiterating a hawkish stance, emphasizing continued rate hikes to support stable inflation and economic growth. With USD/JPY consolidating near recent highs and long-end JGBs under pressure, the government may intervene in FX markets to stabilize the yen if upward momentum resumes, MUFG's FX analyst Lee Hardman reports.

USD/JPY consolidates between 155 and 158

"The hawkish repricing of BoJ rate hike expectations was encouraged by comments from Governor Ueda overnight. He used his first public appearance this year to reiterate that 'we will keep raising rates in line with the improvement in the economy and inflation' adding that 'the appropriate adjustment of monetary easing will lead to the achievement of stable inflation target and longer-term economic growth'. He expects the 'mechanism between moderate wage growth and inflation is likely to maintained'."

"The weak yen will keep pressure on both the BoJ to hike rates sooner, and the government to consider intervening directly in the FX market to provide support for the yen. One positive for Japan has been that USD/JPY has been consolidating at higher levels between 155.00 and 158.00  over the last couple of months."

"The risk of intervention would step up if USD/JPY regains upward momentum and retests last year’s highs at 158.87. The sell-off at the long-end of the JGB curve also highlights that the government needs to take action to restore confidence in their commitment to  fiscal discipline which would help ease yen selling pressure as well."