The Bank of Japan's expectation for interest rate hikes in July is heating up, and the Japanese yen has risen above 150 against the US dollar

As expectations for interest rate hikes by the Bank of Japan rise, the exchange rate of the yen against the dollar briefly broke through the 150 mark, reaching a new high since December of last year.

On Thursday, February 19, data showed that the yen rose by 1% against the dollar, reaching a level of 149.95, and is currently reported at 150.03. Meanwhile, the yield on Japan's 10-year benchmark government bonds also climbed to its highest level since 2009.

Overnight index swap pricing shows that traders expect the probability of a rate hike at the Bank of Japan's July meeting to have risen to 85%, a significant increase from 70% earlier this month. The market generally believes that the Bank of Japan will raise rates by September at the latest.

Multiple factors are driving the appreciation of the yen. Yesterday, Bank of Japan Policy Board member Hajime Takata stated:

"It is important to continue considering gradual rate hikes, as the trend in Japanese government bond yields is consistent with the market's view of the economy."

Today, Bank of Japan Governor Kazuo Ueda met with Prime Minister Shigeru Ishiba to discuss economic and financial market issues, stating that the two sides did not discuss the issue of rising yields. Analysts pointed out that if the Prime Minister does not express opposition to the direction of Japanese government bonds, it effectively serves as a green light for another rate hike. This has been priced in as a strengthening of the yen and a decline in Japanese government bonds.

Previously, Ueda also stated that if the economic outlook materializes, he would continue to raise rates.

From the data perspective, Japan's economy is performing strongly, providing support for further rate hikes. The latest data shows that Japan's Gross Domestic Product (GDP) exceeded expectations, and nominal wage growth reached a nearly 30-year high.

On the other hand, rising geopolitical risks have also supported demand for yen purchases to some extent. Shoki Omori, Chief Global Strategist at Mizuho Securities in Tokyo, stated that the strengthening of the yen is supported by the fundamental trend of the dollar being under pressure, while increased geopolitical risks have also driven yen purchases.

Market participants generally believe that the upcoming Japanese Consumer Price Index (CPI) data to be released on Friday will be a key factor influencing the yen's movement. If the CPI data is stronger than expected, it may further drive the appreciation of the yen. Economists surveyed by Bloomberg expect the median year-on-year growth rate of Japan's CPI to be 4%, which, if realized, would mark the highest level since January 2023.

Charu Chanana, Chief Investment Strategist at Saxo Markets in Singapore, believes:

"If tomorrow's inflation data is stronger than expected, it may further stimulate market speculation about a rate hike by the Bank of Japan. The key support level is at 148.65, and if the CPI exceeds expectations, the yen against the dollar may reach this level."