HG MARKETS:

The Japanese yen surged to its highest level in five months on Friday, driven by growing demand for safe-haven assets and speculation surrounding potential interest rate hikes by the Bank of Japan (BOJ). As concerns over global economic uncertainties intensified, the yen gained momentum, benefiting from its reputation as a stable store of value in times of turmoil. The USD/JPY currency pair saw a 0.3% decline, bringing the exchange rate to 147.50 yen. Earlier in the day, the pair had dropped to 147.31 yen, its lowest point since early October 2024. This decline marked a significant shift, as the yen’s strengthening trend gained traction over the past week, signaling renewed investor confidence in the currency.

The yen’s rise this week was largely driven by a surge in safe-haven buying, especially amid rising uncertainty over U.S. trade policies. Earlier this week, U.S. President Donald Trump imposed tariffs on Canada and Mexico, only to swiftly reverse his decision shortly thereafter. However, Trump’s warning of potential new tariffs in early April, particularly his long-discussed plans to impose reciprocal tariffs on U.S. trading partners, created additional anxiety in global markets. As a result, investors sought the yen as a protective measure against potential economic instability, further boosting its value.

In addition to global trade concerns, hawkish signals from the Bank of Japan played a significant role in supporting the yen’s strength. BOJ Deputy Governor Shinichi Uchida indicated that the central bank was considering further rate hikes, signaling a shift in the BOJ’s long-standing accommodative monetary policy. However, Uchida made it clear that a rate increase at the BOJ’s upcoming meeting in March was unlikely. This was in contrast to previous expectations that the central bank might hold off on tightening its policies.

The BOJ had already raised interest rates by 25 basis points to 0.5% in January, a move that was seen as a response to robust economic growth, inflation levels surpassing the bank’s target, and optimism about continued wage increases. With Japan’s economy showing signs of strength and inflationary pressures mounting, there were growing expectations that the BOJ could implement another rate hike as soon as May. These expectations were bolstered by persistent inflation, which had remained sticky despite earlier policy measures.

A key factor in the potential for a May rate hike was the timing of the BOJ’s meeting, which will coincide with Japan’s annual spring wage negotiations. These negotiations, involving unions and major employers, are expected to result in another year of significant wage hikes, which would provide additional support for the BOJ’s tightening policy. The country’s consumer price index (CPI) inflation surged to a two-year high of approximately 4% in January, doubling the BOJ’s annual target range. Additionally, core inflation, which excludes volatile food and energy prices, hit a 19-month high, signaling that inflationary pressures were not easing as expected.