FILE PHOTO: A Japanese flag flutters atop the Bank of Japan headquarters in Tokyo, Japan December19, 2025. REUTERS/Manami Yamada/File Photo
TOKYO: Hawkish signals from the Bank of Japan on Friday lifted short-term government bond yields to a three-decade high, but did little to curb persistent weakness in the yen.
The central bank raised its economic and inflation forecasts and reiterated a pledge to continue policy tightening, after it left policy settings unchanged, as had been widely expected considering officials had raised rates to a 30-year high of 0.75% at their last meeting only a month earlier.
Still, BOJ board member Hajime Takata, a perennial hawk, again dissented, lobbying to raise rates by a further quarter point.
"The focus on inflation looks a little bit hawkish - I think it shows that the BOJ intends to continue to hike the policy rate," said Tohru Sasaki, chief strategist at Fukuoka Financial Group.
"The question is: How fast, how far?"
The yield on two-year JGB, which is particularly sensitive to the monetary policy outlook, jumped 3 basis points (bps) to 1.245%, a level not seen since August 1996. Yields rise when bond prices fall.
Yields on five- and 10-year notes also ticked higher, while those on longest-dated bonds eased further from record peaks hit earlier this week following a flare-up in fiscal worries after Prime Minister Sanae Takaichi pledged to expand fiscal stimulus, including a suspension of the consumption tax on food.
She dissolved parliament on Friday to pave the way for a snap election on February 8, gambling that her personal popularity among voters can expand the government's slim majority.
The yen, meanwhile, traded about 0.1% weaker against the U.S. dollar on the day, continuing a gentle drift lower from the previous four sessions and moving incrementally back towards the 1-1/2-year low of 159.45 yen from January 14. It last changed hands at 158.595.
The currency's doldrums have become an increasing focus at the central bank, as some officials worry it could accelerate inflation. It has remained weak despite BOJ policy tightening and the accompanying rise in bond yields, perplexing many market watchers.
Japanese stocks were marginally higher on the day, with the Nikkei gaining 0.2% to 53,792.99 and the broader Topix adding 0.3% to 3,628.44. Banks were among the outperformers, with a Topix banking index climbing 1.8% to be the second-best performer among the 33 industry groups.
Attention now turns to BOJ Governor Kazuo Ueda's news conference at 0630 GMT for any additional clues on the pace of rate hikes.
The BOJ "is now in a phase of taking time to assess the effects" of last month's rate hike on the economy, said Hirofumi Suzuki, chief foreign-exchange strategist at SMBC.
"While the messaging will be quite delicate, we expect the governor to strike as cautious a tone as possible on FX, and to indicate that the BOJ stands ready - if necessary - to coordinate with the government regarding bond market developments."
Swaps markets currently anticipate two quarter-point hikes this year, with the first one fully priced in by July, according to LSEG calculations. - Reuters
