MUFG analysts see June rate hike justified by robust Tankan survey, but markets price only 6bps of further tightening by September.
Stronger-than-expected Tankan data released by the Bank of Japan today bolster the case for its June rate hike and support further tightening. Markets, however, remain cautious, pricing just 6bps of additional tightening for September and nearly a full hike by December.
Inflation risks are rising due to the yen’s depreciation, while Japanese authorities have softened intervention rhetoric. USD/JPY volatility remains low, with 1-month implied volatility at 6-7%, the lowest since before Russia’s invasion of Ukraine. JGB markets and equities remain stable, allowing for a controlled grind higher in USD/JPY.
Analysts warn that if markets perceive a shift in Ministry of Finance strategy, yen selling could accelerate. Current conditions—low volatility and stable JGBs—may encourage a gradual approach, but risks persist in thin market conditions.