USD/JPY Declines as JGB Yields Soar and BoJ Signals Prudent Policy Stance

TOKYO, May 22, 2025 – The USD/JPY exchange rate experienced a brief uptick following confirmation from U.S. and Japanese officials that existing currency policies would remain unchanged, with no discussions on specific foreign exchange levels. However, the pair soon reversed course, slipping to 143.7650, a 0.51% decline from the previous session’s 144.5050, according to real-time market data.

This downward movement coincided with a surge in Japanese government bond (JGB) yields, particularly at the long end of the curve, as reported by BBH FX analysts. The 10-year JGB yield reached 1.55% on Thursday, reflecting market adjustments to the Bank of Japan’s (BoJ) ongoing monetary policy normalization efforts and heightened inflationary pressures.

BoJ Cautious Amid Rising JGB Yields

Bank of Japan board member Asahi Noguchi addressed the sharp rise in JGB yields, describing the movement as “sudden” but not necessarily abnormal. “I can’t simply conclude that they are abnormal…so I believe it would be inappropriate to intervene without reason and attempt to manipulate the situation,” Noguchi stated.

The BoJ is currently reducing its JGB purchases by ¥400 billion per quarter, a plan initiated in August 2024, with an interim assessment scheduled for the June 2025 Monetary Policy Meeting. Analysts at BBH expect the BoJ to maintain this pace while emphasizing readiness to conduct one-off purchases to stabilize markets if needed, especially given recent volatility in the JGB market.

Private Sector Activity Contracts in May

Japan’s private sector activity slipped into contraction in May 2025, with the composite PMI dropping to 49.8 from 51.2 in April. The services PMI fell 1.6 points to 50.8, while the manufacturing PMI saw a slight uptick of 0.3 points to 49.0. Despite this downturn, the swaps market remains optimistic about BoJ policy tightening, pricing in 50 basis points of rate hikes to 1.00% over the next two years. This sentiment aligns with the BoJ’s revised 2025 inflation forecast of 2.1%, up from 1.9%, reflecting expectations of persistent inflationary pressures as inflation relief measures expire.

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Market Dynamics and Future Outlook

The decline in USD/JPY reflects broader market dynamics, including a strengthening yen driven by safe-haven demand amid global uncertainties, such as concerns over U.S. debt and a risk-off mood impacting Wall Street, as noted in recent posts on X. Japan’s 10-year JGB yield approaching 1.6% signals market anticipation of a higher terminal rate, with some traders questioning the BoJ’s resolve to manage debt sustainability, according to social media discussions. The BoJ’s cautious approach, balancing inflation control with market stability, will likely remain a focal point for investors as the June 2025 policy review nears.