The Japanese yen rose 1% against the US dollar at one point, reaching 149.95, the highest level since December 9, 2023. The yield of Japanese 10-year treasury bond bonds rose to the highest level since 2009, indicating that the market's bet on future interest rate hikes is increasing.

Overnight index swap (OIS) data shows that traders expect the probability of a rate hike before July to rise to 85%, higher than the 70% at the beginning of this month, and a rate hike before September is considered a certainty.

The core driving force behind the strengthening of the Japanese yen lies in the support of Japanese economic data for interest rate hikes, and the unexpected growth of gross domestic product (GDP), indicating a strong economic recovery.

The nominal wage growth has reached a new high in nearly 30 years, exacerbating inflationary pressures and strengthening the reasons for interest rate hikes. At the same time, BOJ officials released hawkish signals. Bank of Japan Governor Kazuo Ueda said on Thursday that when meeting with Prime Minister Ishiba, there was no discussion about the appreciation of the yen or the rise of treasury bond bond yields.

This statement may give the market confidence that the government's attitude towards the strengthening of the yen and interest rate hikes is relatively loose. "- Alex Loo, macro strategist in Singapore

Hajime Takata, director of the Bank of Japan, said on Wednesday that it was important to continue to consider gradually raising interest rates, and pointed out that the rise in the yield of Japanese treasury bond bonds was in line with market expectations for the economy.

Market interpretation: The government may default to the appreciation of the Japanese yen

"If the Japanese Prime Minister does not oppose the rise of treasury bond bond yields, it will give the Bank of Japan a green light to raise interest rates again." - Mark Cranfield, Bloomberg market strategist

Short term focus: Japan's CPI data may further push up the yen

Japan will release Consumer Price Index (CPI) data on Friday, and the market expects inflation to reach 4%, the highest level since January 2023. Traders believe that if CPI exceeds expectations, it may trigger more investors to buy yen, further enhancing expectations of interest rate hikes.

If the CPI data is higher than expected, the yen may further strengthen, testing the key support level of 148.65. "- Charu Chanana, Chief Investment Strategist at Saxo Markets

The trend of the Japanese yen still faces resistance

Although the market is optimistic about the Japanese yen, there are still some factors that may limit its further appreciation: due to the negative real interest rates in Japan, Japanese investors' demand for overseas assets remains strong, which may limit the appreciation space of the yen.

The appreciation of the yen may reduce the urgency for the Bank of Japan to raise interest rates. If the yen remains below 150, the Bank of Japan may postpone the timing of interest rate hikes.

We expect the Bank of Japan to raise interest rates by 25 basis points in May, but if the yen continues to appreciate, the rate hike may be postponed until the summer. "- Min Joo Kang, Senior Economist at ING

Editor's viewpoint:

In the short term, the market's bet on the Bank of Japan raising interest rates early has driven a significant appreciation of the yen, but the final timing of the rate hike still depends on future inflation data and the policy attitude of the Japanese government.

If the CPI data is strong, the market's confidence in interest rate hikes will further strengthen, and the yen may continue to strengthen. But if the Bank of Japan believes that the appreciation of the yen is sufficient to curb inflation, it may postpone the timing of interest rate hikes, and the market needs to closely monitor subsequent policy movements.