Insights 
VT 
After the US and Japan reaffirmed existing currency policies without discussing foreign exchange levels, USD/JPY experienced a brief rise but then declined. Meanwhile, yields on Japanese government bonds are increasing at the long end of the curve.
A Bank of Japan board member recognised recent shifts in yields but refrained from considering them unusual. The Bank of Japan is reducing its Japanese government bond purchases by approximately ¥400 billion quarterly, with an evaluation set for June 2025.
Japan’s Economic Data
Economic data revealed that Japan’s private sector regressed into contraction in May. The composite PMI dropped to 49.8, services PMI fell to 50.8, while the manufacturing PMI slightly increased to 49.0.
Despite the decline in private sector activity, the swaps market anticipates a 50 basis points increase in BOJ rates to 1.00% within two years. Official positions or recommendations are not provided, and individuals should conduct their own thorough research before making investment decisions.
Broadly speaking, what’s clear from the recent developments is that Japanese policymakers, while signalling slight adjustments, are not inclined to spark large currency market moves through verbal intervention alone. Following the joint statement from Tokyo and Washington, which notably avoided any talk of exchange rate levels, there was an initial push higher in USD/JPY. Yet, that lift was short-lived, fading quickly as it became evident that no direct measures were attached to the statement. This suggests a familiar pattern: pronouncements that reassert commitment to macro frameworks, but without new levers being pulled.
Bond markets are already adjusting expectations. Yields across the Japanese curve, particularly in longer maturities, have been creeping higher. That’s happening even as the BOJ continues, albeit slowly, to trim its support for the sovereign debt market. The central bank’s decision to reduce JGB purchases by roughly ¥400 billion a quarter—subject to a full review by the middle of next year—appears to be a gradual effort to re-anchor market functioning; they’re guiding without heavy hands. For us, this is less about timing the policy tweak and more about gauging the system’s elasticity to pressure over time. The long end moving suggests preparation for modest policy recalibration, not dislocation.
Softening Economic Outlook
Notably, one BOJ board member acknowledged the rise in domestic yields but was quick to say the moves don’t stand out when compared with historical norms. That’s worth focusing on. Read between the lines, and it sounds like the BOJ is attempting to pre-empt concerns about market dysfunction or runaway selling.
What complicates the picture, though, is the softening in the broader economy. PMI data for May shows Japan’s private sector activity fell below the 50.0 threshold—a line that marks the difference between expansion and contraction. The services sector is barely holding above water at 50.8; manufacturing lingers underwater, still at 49.0. This contraction in the composite PMI to 49.8 suggests consumption and production activity could weaken further if confidence erodes. We need to factor in how this backdrop limits the BOJ’s room to rush ahead with more assertive tightening, regardless of what swaps pricing might imply.
Still, swaps traders have raised their expectations. The market now leans towards the view that the BOJ could reach a policy rate of 1.00% within two years, up from 0.50%. This is notable, not because it signals imminent action, but because it demonstrates that traders are looking past the soft patch in data, instead anchoring their views on longer-term yield pressures and policy normalisation. In other words, they’re not buying the idea that slow growth necessarily halts tightening from here.
From our point of view, these conditions create pockets of opportunity—but only in carefully timed exposures. We can already observe that forward curves, especially in interest rate derivatives, are baking in a slow but steady change in policy regime. What this suggests is that near-dated rate movements are unlikely to be dramatic, but there may be value in selectively positioning for higher medium- to long-term rates.
Watching how the BOJ manages its upcoming July meeting will be important, particularly for insights into the scale and tone of bond purchase adjustments. Close attention should also be paid to any signals around inflation trends and wage pressures, as these will likely act as the clearest guideposts for when the next lift might come—not public statements, which for now remain measured.
Ultimately, the dissonance between softer economic data and firmer rate expectations reflects a balancing act that’s playing out across Japanese financials. Timing entries and exits into such markets demands a clear-eyed view not just of central bank intent, but also of the quiet pricing shifts happening beneath.
