Yen Strengthens as Markets Bet on a Bank of Japan Rate Hike

The Japanese yen advanced to a two-week high on Monday, pushing the USD/JPY pair down by roughly 0.5% as expectations grew that the Bank of Japan may soon raise interest rates. The move came after comments from BoJ Governor Kazuo Ueda, who signaled a willingness to consider tightening policy at this month’s monetary meeting, lending fresh momentum to the yen.

Safe-haven demand also supported the currency after Japan’s Nikkei index fell 1.9% during the session, although the yen later eased slightly as U.S. Treasury yields began to climb. Economic data, however, delivered a mixed picture. Capital expenditure in the third quarter rose 2.9% year-on-year—well below forecasts of 6%—while spending excluding software matched that 2.9% increase, also missing expectations.

Japan’s manufacturing sector continued to show signs of strain, with November’s revised Purchasing Managers’ Index slipping to 48.7, reinforcing ongoing contraction in factory activity.

Governor Ueda reiterated that the central bank will “assess the pros and cons of a rate hike” and base its decision on a thorough evaluation of domestic and global conditions in the economy, inflation trends, and financial markets.

Market pricing now reflects an 86% probability of a rate increase at the BoJ’s December 19 meeting, signaling a potential turning point after years of ultra-loose monetary policy and boosting the yen’s appeal in currency markets.