USD/JPY: BoJ's Takata hints at eventual tightening

Bank of Japan board member Hajime Takata on Thursday signalled openness to gradually normalise policy in time, though he emphasised interest rate hikes remain premature. USD/JPY retreated under 150.00 as traders weighed the implications.

Takata said there are finally signs to hit the 2% inflation target, potentially allowing an eventual exit from yield curve controls and negative rates. However, he ruled out raising rates consecutively, highlighting the need for a cautious approach to support small businesses.

His commentary has sparked volatility in yen crosses, while also putting pressure on USD/JPY, which has powered higher this month as investors ditch yen positions to purchase overseas assets amid an increased appetite for risk.

The Japanese currency has drastically underperformed major crosses in February, plummeting to nine-year lows versus the Australian and New Zealand dollars as the Bank of Japan rebuffs global monetary tightening.

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While Takata said policymakers have “various options” in dismantling crisis-era stimulus, he labelled rate hikes as an extreme step.

This may dampen expectations for a March hike, though conviction is firming that the BoJ will incrementally normalize settings to match Japan’s economic realities. For now, global tailwinds for the yen remain fierce as the bank preserves its ultra-accommodative policy mix.

At the time of writing USD/JPY was trading at 149.69, down 0.65% on the day.