Yen jumps 2 per cent as Bank of Japan rate hike bets grow

The Japanese yen has climbed more than 2 per cent against the dollar, hitting 155.57, its strongest level in a month, on speculation that the Bank of Japan is about to raise interest rates. The move came on top of a 0.9 per cent gain the previous day.

Markets on edge

Global markets remain jittery after this week's dramatic government bond sell-off, driven by fears that higher oil prices could reignite inflation. Investors have been recalibrating their expectations for interest rates across major economies, with Japan in focus.

A Bank of Japan policymaker, Hajime Takata, appeared to strengthen the case for action by saying the central bank needs to move more "nimbly". Citi told clients that Takata's remarks were the "strongest messaging we've heard from the board and reintroduces the idea of an expedited rate hike trajectory".

Markets now put a 77 per cent chance on a rate increase at the BoJ's next meeting, which begins on 17 September. The central bank has been raising rates gradually for two years, but left its main policy rate unchanged at 1 per cent in July.

Officials on high alert

The scale of the yen's appreciation over such a short period underlines the febrile state of markets, according to Nigel Green, chief executive of financial adviser deVere. "Markets this jumpy don't need a shock to move hard, a rumour is enough," he said.

Japan's vice-finance minister for international affairs, Atsushi Mimura, said he was "neither satisfied nor reassured", adding that policymakers "remain on a state of heightened alert".

The global bond sell-off, which pushes up the yield on government borrowing, had intensified earlier this week after US Federal Reserve chair Kevin Warsh signalled his determination to bring inflation back to target. Speaking at the Jackson Hole central bankers' conference, Warsh said that if inflation did not move towards the 2 per cent target, the Fed would have "more to do".

Dollar weakens

Further pressure on the dollar came from Fed governor Christopher Waller, who indicated he was leaning towards holding rates steady at this month's Fed meeting. Quoting John Lennon, Waller told Reuters: "I'm going to paraphrase John Lennon here: 'give disinflation a chance'. We can wait one meeting."

The dollar fell further against the yen after his comments and also weakened against the pound and the euro.

The bond sell-off appeared to ease on Thursday, with yields on 10-year UK gilts hovering near 5.1 per cent in morning trading, after touching the highest level since 2008, close to 5.3 per cent, earlier in the week.