Japanese Yen Surges 1% Against Pound & Dollar As Investors Count Down To NIRP's Demise

Above: File image of BoJ Governor Kazuo Ueda © Sérgio Garcia, ECB.

The Japanese Yen rallied by a per cent against the major currencies after Bank of Japan Governor Kazuo Ueda said policy management would "become even more challenging from the year-end and heading into next year".

Ueda was referring to the sustainability of the Bank's negative interest rate policy (NIRP), which investors are betting will soon end, with market pricing showing investors even see a chance rates are raised as early as this month.

Ueda then visited Prime Minister Fumio Kishida's office amidst heightened market action, which saw Japanese bond yields surge, adding to the sense that change could come earlier than previously thought.

This means the single most significant long-term drag on the Yen could be about to dissipate.

Midweek, BoJ Deputy Governor Himono got the ball rolling when addressing the impact of negative rates, pointing out that households could benefit from higher net interest income if rates were positive.

"Comments from Bank of Japan officials have suddenly seen investors ramp up the chances that the BoJ could bring an end to their negative interest rate policy," says Henry Allen, a strategist at Deutsche Bank.

The Pound to Yen exchange rate has fallen 1.0% on the day to 183.31, taking it to a one-month low. The Dollar to Yen conversion is down by a similar margin at 145.94, while the Euro to Yen is also down by close to a per cent at 157.20.

Above: GBPJPY and USDJPY at one-hour intervals. Track JPY with your own custom rate alerts. Set Up Here.

Himono said, "there would be a sufficient possibility of achieving a positive outcome from the exit, since a wide range of households and firms would benefit from the virtuous cycle between wages and prices".

"So some fairly positive remarks about what could happen in such a scenario," says Deutsche Bank's Allen.

The messaging all points to one of the most anticipated pivots in central banking drawing close; it is little wonder the Yen is powering ahead.

"The fact that the Governor and Deputy Governor have begun thinking and talking in public about an exit from NIRP has led the market to become nervous about a potential hawkish shift by the BoJ at its meeting on 19 December," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

Investors are now pricing in a 37% chance that the Bank of Japan are going to end their negative interest rate policy at the meeting on December 19, and at one point overnight, that even got as high as 45%, according to Deutsche Bank.

Japanese government bonds were sold, resulting in yields on the ten-year bond rising some +11.5 basis points, providing the mechanism for gains by the Yen.

"Moreover, the impact hasn’t just been confined to Japan, with yields on 10yr Treasuries up +6.8bps overnight to 4.17%," says Allen.