Bank of Japan to Hike Rates This Week Unless Market Instability Picks Up, Says Mitsubishi UFG

The Japanese yen strengthened past 156 per dollar on Monday, extending last week’s gains as investors prepared for the Bank of Japan’s upcoming policy decision.

BOJ Governor Kazuo Ueda and Deputy Governor Ryozo Himino suggested the possibility of a rate hike at this week’s meeting, supported by strong inflation and wage data.

Additionally, Japan’s Finance Minister Katsunobu Kato reiterated the government’s commitment to taking "appropriate action" to support the yen, further bolstering the currency.

On the data front, Japan’s machinery orders rose 3.4% month-on-month in November, defying market expectations of a 0.4% decline and marking the strongest growth in nine months.

Externally, the yen also benefited from a pullback in the US dollar ahead of Donald Trump’s inauguration, as traders awaited more clarity on his proposed policies.

The latest Market Talks covering FX and Fixed Income. Published exclusively on Dow Jones Newswires throughout the day.

1931 ET - Japanese stocks are higher in early trade as a weak yen raises hopes for earnings growth. Electronics and pharmaceutical shares are leading the gains. Daiichi Sankyo is up 6.0% and Hitachi Ltd. is 2.2% higher. USD/JPY is at 156.11, up from 155.64 as of Friday's Tokyo stock market close. Investors are focusing on any monetary policy-related developments ahead of the Bank of Japan's meeting later this week. The Nikkei Stock Average is up 0.9% at 38812.19. (kosaku.narioka@wsj.com; @kosakunarioka)

1930 ET - JGB futures consolidate in the morning Tokyo session, with market focus on incoming U.S. President Trump's inauguration later. As long as the policies unveiled by Trump at his inauguration are benign for the global economy and don't spur financial market turbulence, the Bank of Japan is likely to deliver a 25bp rate increase this week, Citi Research's Katsuhiko Aiba says in a note. However, Citi wouldn't rule out turbulence given Trump's usual style of leading with hawkish rhetoric. Hence, there's considerable uncertainty though markets have mostly priced in a BOJ rate increase this week, the economist adds. JGB 10-year futures are 0.02 yen higher at 141.02 yen. (ronnie.harui@wsj.com)

1917 ET - Asian currencies consolidate against the dollar ahead of President Trump's inauguration due later today. The greenback is expected to be mostly influenced by U.S. political developments this week, Commonwealth Bank of Australia's Global Economic & Markets Research team says. While Trump has indicated that he'll sign dozens of executive orders on his first day in office, "we judge expectations may be too high for policy announcements this week," the team says in a research report. Hence, CBA expects the greenback to weaken again this week. USD/KRW is little changed at 1,458.39; AUD/USD edges 0.1% higher to 0.6203.(ronnie.harui@wsj.com)

1904 ET - The yen is likely to strengthen into the Bank of Japan's two-day meeting ending Friday, as markets haven't fully priced in a 25bp rate increase yet, members of Nomura's Global Markets Research team say in a report. "If there are no major negative surprises around Trump's inauguration and markets remain stable, the BOJ is likely to deliver a rate hike," they say. This will probably put upward pressure on the yen against other currencies owing to a narrowing of interest-rate differentials, the members say. Given recent BOJ communications, Nomura now expects the central bank to raise rates by 25 bps in January and July. USD/JPY is little changed at 156.34; EUR/JPY edges 0.1% higher to 160.75. (ronnie.harui@wsj.com)

1903 ET - There's little merit in arguments that the Reserve Bank of Australia needs to cut interest rates in February to support the job market given its surprise strength in late 2024, and the central bank should continue its efforts to reduce inflation which is still above its target, says Warren Hogan, chief economic advisor at Judo Bank. The economy remains on solid footing and that there is no clear urgency to enter a cutting cycle, he adds. Recent wage data and a rise in job vacancies suggests there needs to be cautious with monetary easing, Higan says. Still, the RBA's February meeting will be live and a move down in the official cash rate is possible, particularly with societal and political pressure for cuts in early 2025. (james.glynn@wsj.com; @JamesGlynnWSJ)

1841 ET - Japanese stocks may rise as a weak yen raises hopes for earnings growth. Nikkei futures are up 0.8% at 38780 on the SGX. USD/JPY is at 156.41, up from 155.64 as of Friday's Tokyo stock market close. Investors are focusing on any monetary policy-related developments ahead of the Bank of Japan's policy meeting later this week. The Nikkei Stock Average fell 0.3% to 38451.46 on Friday.(kosaku.narioka@wsj.com)

1716 ET - Recent AUD/USD weakness has been cited as a headwind to the Reserve Bank of Australia cutting interest rates in February. Still, the central bank will probably press ahead with a reduction regardless, says Ben Jarman, chief economist at JP Morgan, Australia. The movement in the AUD trade-weighted index usually has a greater impact on imported inflation than bilateral rates. Empirically the pass-through from changes in the TWI to inflation is quite small, Jarman adds. All else being equal, RBA rules of thumb imply the decline in the TWI since November should only lift CPI by 0.2 percentage points over a few years, he says. Also, the rise in bond yields recently has countered some of the slippage in financial conditions tied to a weaker exchange rate, Jarman adds. (james.glynn@wsj.com; @JamesGlynnWSJ)

1654 ET - Political developments will shape trading in USD this week. Still, investors expecting incoming U.S. President Donald Trump to immediately sign a swath of executive orders to launch his term might be disappointed, says Joe Capurso, head of international and sustainable economics at CBA. That would expose the USD to a week of weakness. Still, if Trump announces large tariff increases in coming days, the USD will climb, he adds. USD index now at 109.41. (james.glynn@wsj.com; @JamesGlynnWSJ)

1651 ET - Goldman Sachs trims its earnings forecast for Fletcher Building as it waits for more evidence that a business turnaround is underway. GS lowers its Ebit outlook fro FY 2025/2026 by 4%, contributing to its price target falling by 4% to A$2.65/share. "Fletcher Building carries latent turnaround potential," analyst Niraj Shah says. "However, macro lead indicators have only just started to stabilize (and potentially distorted by policy)." That is creating earnings risk in the short-to-medium term, GS says. Also, it believes management needs to outline early its plans to close the margin gap with global peers. Fletcher Building ended last week at A$2.57. (david.winning@wsj.com; @dwinningWSJ)

Japanese stocks are higher in early trade as a weak yen raises hopes for earnings growth. Electronics and pharmaceutical shares are leading the gains. Daiichi Sankyo is up 6.0% and Hitachi Ltd. is 2.2% higher. USD/JPY is at 156.11, up from 155.64 as of Friday's Tokyo stock market close. Investors are focusing on any monetary policy-related developments ahead of the Bank of Japan's meeting later this week. The Nikkei Stock Average is up 0.9% at 38812.19. (kosaku.narioka@wsj.com; @kosakunarioka)

Japanese stocks may rise as a weak yen raises hopes for earnings growth. Nikkei futures are up 0.8% at 38780 on the SGX. USD/JPY is at 156.41, up from 155.64 as of Friday's Tokyo stock market close. Investors are focusing on any monetary policy-related developments ahead of the Bank of Japan's policy meeting later this week. The Nikkei Stock Average fell 0.3% to 38451.46 on Friday.(kosaku.narioka@wsj.com)

The US dollar rose against its major trading partners early Friday, except for a small decline versus the euro, ahead of another busy data release day before the long US holiday weekend.

Housing starts data for December are due to be released at 8:30 am ET, followed by industrial production data for December at 9:15 am ET.

The Atlanta and St. Louis Federal Reserve banks are due to release updates to their gross domestic product Nowcast estimates around midday. The Treasury's TICS data for November are due at 4:00 pm ET.

A quick summary of foreign exchange activity heading into Friday:

rose to 1.0305 from 1.0300 at the Thursday US close and 1.0289 at the same time Thursday morning. Eurozone consumer prices rose as expected in December, lifting the year-over-year rate for the overall consumer price index and keeping the core year-over-year rate in line with the previous month, according to data released earlier Friday. The next European Central Bank meeting is scheduled for Jan. 30.

fell to 1.2210 from 1.2231 at the Thursday US close but was above a level of 1.2205 at the same time Thursday morning. UK retail sales declined unexpectedly in December, but sales were still up sharply from a year earlier. Bank of England Governor Andrew Bailey and Deputy Governor Sam Woods are due to speak at 12:00 pm ET. The next Bank of England meeting is scheduled for Feb. 6.

rose to 155.6938 from 155.2136 at the Thursday US close but was below a level of 155.8078 at the same time Thursday morning. There were no Japanese data released overnight. The next Bank of Japan meeting is scheduled for Jan. 23-24.

rose to 1.4414 from 1.4398 at the Thursday US close and 1.4376 at the same time Thursday morning. Canadian foreign securities purchase data for November are due to be released at 8:30 am ET. The next Bank of Canada meeting is scheduled for Jan. 29.

Japanese stocks ended lower as concerns about borrowing costs continue ahead of the Bank of Japan's policy meeting next week. Auto and game stocks led the declines. Toyota Motor shed 1.7% and Capcom lost 2.0%. Nintendo dropped 4.3% after the announcement of Switch 2 lacked key details and failed to impress investors. The Nikkei Stock Average fell 0.3% to 38451.46. Investors are focusing on any monetary policy-related developments and conflicts in the Middle East. The 10-year Japanese government bond yield stayed flat at 1.200%. USD/JPY is at 155.67, compared with 155.17 as of Thursday 5 p.m. Eastern time. (kosaku.narioka@wsj.com; @kosakunarioka)