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Asian equities fell on Monday as Iran-related fears weighed on sentiment, with Japan leading losses after BoJ Governor Ueda signaled potential rate hikes and currency costs. Tech names in Korea and Hong Kong slid on AI demand concerns, while other regional markets moved in a mixed pattern as oil prices rose and U.S. futures traded lower.
The Japanese yen fell after reports that Prime Minister Takaichi told BoJ Governor Ueda she was reluctant to pursue further rate hikes, placing pressure on the central bank and helping push USD/JPY toward the 156 area amid potential intervention risk from Japan’s finance ministry.
Former BOJ board member Makoto Sakurai says the central bank could raise rates as soon as March if the yen slides, with a potential 25 basis-point hike and possibly another in 2026–27 to push the policy rate toward 1.75%. He warns faster tightening could strain banks, though inflation remains above target and wage growth could justify action. Economists expect about 1% by end-June, and the next policy meetings are March 18–19 and April 27–28.
Japan’s January headline inflation fell to 1.5%, the lowest since March 2022 and ending 45 months of inflation above the BOJ’s 2% target. Core inflation was 2.0% and core-core 2.6%, with falls in fresh food, meat and energy prices driving the slowdown. GDP grew 0.1% in Q4, narrowly avoiding recession. The BOJ upgraded its 2026 outlook to 1.9% core and 2.2% core-core inflation and expects inflation to dip below 2% in early 2026 as food prices stabilise and tax relief/support measures persist. Despite slow price pressure, rate hikes are anticipated, with a June move to about 1% likely after wage data.
Japan's economy grew 0.1% in Q4 2025, narrowly avoiding a technical recession (annualized +0.2%) but missing economists' 0.4% forecast; private consumption led the gain while exports and public spending lagged, and the BOJ lifted its 2026 growth outlook. The release comes as Tokyo and Washington push a $550 billion investment pledge under their trade deal, with currency moves and domestic politics shaping sentiment.
The New York Fed’s rate check aimed at stabilizing the yen signals closer U.S.-Japan coordination but a direct, joint intervention remains unlikely for now due to U.S. domestic considerations and the potential costs of Japan selling Treasuries; even as intervention thresholds ease, the BOJ’s cautious stance and political hurdles keep a lasting yen-rescue option uncertain, leaving markets watching for further signals.
USD/JPY extended declines in thin liquidity, down about 120 pips intraday and roughly 500 pips from Friday’s 159.23 high, as markets price in potential intervention after BOJ signals and comments from Japanese officials ahead of February elections; a crowded trade prompts risk of further downside into the week.
Japan's PM Sanae Takaichi pledges to curb speculative market moves after a yen spike tied to her expansionary fiscal plan, while proposing a two-year suspension of the 8% food sales tax; opposition talks of tapping the BOJ's ETF holdings or currency reserves to fund tax cuts, raising concerns over central-bank independence and market impact ahead of a snap election.
PM Sanae Takaichi pledged to take necessary steps against speculative or abnormal market moves after a yen spike and bond rout tied to expansionary fiscal policy and the BOJ’s slow rate hikes, while promising a two-year suspension of the 8% food sales tax; opposition parties floated funding a tax cut by tapping the BOJ’s ETF holdings or currency intervention reserves, prompting concerns about market impact and central-bank independence as the BOJ signals readiness for emergency bond-buying if yields rise.
Asia’s stock markets rose on Friday led by tech names, with Japan’s Nikkei 225 edging higher after the BOJ kept rates at 0.75% and raised its inflation and growth forecasts for fiscal 2025–26, ahead of Governor Ueda’s remarks. Broadly, regional gains came as Wall Street recovered on AI optimism, though sentiment was tempered by Trump’s Greenland comments and other risk headlines; S&P 500 futures were modestly higher, while gold climbed to a fresh record. South Korea outperformed while India lagged in a week that was otherwise muted for many Asian markets.
The yen traded choppily as investors fretted about possible direct BOJ intervention after the central bank signaled a hawkish tilt and potential further rate hikes; 2-year Japanese government bond yields rose to about 1.25%, the highest since 1996, while global stocks were modestly higher and the dollar sagged toward its weakest levels of the year as Fed rate-cut expectations remained subdued.
The yen weakened toward 158.5 per dollar after the BOJ kept rates steady and raised its forecasts, with traders awaiting Governor Ueda's remarks for clues on the next rate move; the dollar is on track for its steepest weekly decline since June amid geopolitical jitters surrounding Greenland and NATO.
Japan’s government bond market wobbled as investors priced in a clash between a spend-heavy fiscal stance under Takaichi Sanae and the BoJ’s tightening path, sending 30-year yields up sharply and the 40-year yield above 4% for the first time, ahead of the BoJ’s policy meeting.
Japan's yen is weakening as markets demand higher interest rates, but raising rates risks a fiscal crisis given gross debt around 240% of GDP while net debt is about 130%. Official FX intervention is unlikely to stop the slide; the more viable path is to reduce gross debt by selling government assets, which could ease depreciation, though illiquid assets and policy risks complicate any such move.
The yen is expected to weaken further against the dollar by 2026, with forecasts suggesting it could reach 160 or beyond, due to persistent structural weaknesses, wide US-Japan yield gaps, and cautious BOJ policies, despite some recent stabilization.