The Yen increased against the USD in the trading session on December 5, after Bloomberg reported that the Bank of Japan (BOJ) is ready to raise interest rates this month if there is no major shock to the economy or financial markets.
The Yen rose 0.4%, to 154.55 JPY/USD, while Japanese government bond futures fell 17 points to 133.94. The yield on the two-year bond - the most sensitive type to monetary policy - has climbed to its highest level since 2007, reflecting strong expectations that the BOJ is preparing to "turn the axis".
According to Bloomberg, the BOJ could signal a further rate hike in the coming period if the outlook is in the right direction, but remain cautious with a specific increase.
Some members of Prime Minister Sanae Takaichi's cabinet are expected to not hesitate to delay the BOJ if the central bank decides to act in December, although some other senior officials say it is too early.
Overnight market data (OIS) shows that the probability of the BOJ raising interest rates this month has skyrocketed to 90%, compared to less than 60% just a week ago.
In the bond market, the yield curve is gradually flattening, showing that investors believe that long-term yields are unlikely to increase further, after a successful 30-year bond auction and clearer signals from the BOJ.
Bond traders who believe the 0.25 percentage point increase is almost "certain" at the December meeting. However, new rumors suggest that Governor Kazuo Ueda could pave the way for another rate hike in early 2026.
Bloomberg Markets Live expert Mark Cranfield said, "the door is open for the BOJ" because the Japanese government has not yet responded negatively, and the 1% interest rate is still considered in the neutral zone.
The news comes just days after Governor Ueda gave the clearest signal ever about a rate hike at the December policy meeting. Such a move could help support the Yen, which is the weakest currency in the G10 group as of this time of the quarter.
If the BOJ does something, it will be a historic turning point after nearly two decades of Japan's super-loose monetary policy - and could have a spillover impact on global financial markets, from the USD exchange rate to Asian capital flows.
