OCBC’s Sim Moh Siong and Christopher Wong highlight that rising long-end Japanese government bond yields are increasingly influencing global curves and the Japanese Yen. Markets now price a high probability of a September BoJ rate hike, but policymakers’ appetite for further tightening is uncertain. The strategists keep their end-2026 USD/JPY target at 163, turning more constructive only if BoJ signals a more aggressive hiking path.

BoJ path and JGB yields in focus

“Part of the rise in long-end yields, particularly in the US, reflects higher real yields driven by persistent fiscal deficits and increasing AI-related corporate financing needs. However, these factors do not fully explain the move.”

“Another factor that should not be overlooked is the spillover from rising long-end Japanese government bond (JGB) yields. Concerns over JPY weakness and perceptions that the BoJ remains behind the curve have not been fully alleviated despite coordinated Japan-US FX intervention and growing debate over a faster pace of BoJ rate hikes.”

“Markets are increasingly pricing in a September BoJ rate hike, with implied odds rising to around 80% from 50% at the start of August. If the BoJ accelerates policy normalisation and the JPY sheds its status as a low-yielding funding currency, the currency should strengthen over time.”

“Quarterly rate hikes through 2027 would be a key catalyst for a more durable JPY appreciation. However, it remains unclear how much appetite policymakers have for additional tightening beyond September or October.”

“We maintain our end-2026 USD/JPY target of 163 but could become more constructive on the JPY if the BoJ signals a more aggressive rate hiking path or if Japan actively encourages capital repatriation, including through institutions such as the GPIF.”