The Japanese yen has been strengthening recently, rising to levels as high as 149.53 yen against the US dollar during Friday's trading session, with an impressive gain of 1.3%. Earlier Tokyo inflation data exceeded expectations, reinforcing expectations of an interest rate hike by the Bank of Japan.

A report released earlier that day by the Japanese government showed that core consumer inflation in the Tokyo metropolitan area excluding fresh food accelerated for the first time in three months in November. The index rose by 2.2% year-on-year, higher than the 1.8% increase in October.

This reading is also slightly higher than the expectations of many economists, with Tokyo's price trend considered a leading indicator of the national trend, indicating that inflation is developing as the Bank of Japan expected.

Bank of Japan Governor Haruhiko Kuroda has repeatedly stated that if the economy and prices develop as the Bank of Japan envisions, they will raise the currently very low policy interest rates.

Higher-than-expected inflation data has driven a sharp rebound in the yen. In addition, due to the closure of the US market on Thursday for Thanksgiving, low liquidity has intensified the volatility of the yen, a dramatic situation that often occurs during holidays.

Expectations for a rate hike continue to heat up.

Some economists and investors expect the Bank of Japan to raise interest rates at the meeting scheduled for late December, but others believe it is more likely to happen in January.

UOB investment strategy analyst Charu Chanana said that the Tokyo inflation data released today, as well as the hawkish information implied in the wage negotiations, are both supporting the further interest rate hike by the Bank of Japan. "In addition, the weakening of the US dollar, and the insufficient market liquidity as US traders enjoy Thanksgiving dinner, are also reasons for the rise in the Japanese yen."

The forward market currently believes that the probability of a rate hike by the Bank of Japan in December is 61%, approximately twice the initial expectation earlier this month. It also believes that there is a 63% probability of a rate cut by the Federal Reserve in December.

The expected narrowing of interest rate differentials between the US and Japan may reduce the attractiveness of using the yen as a funding currency for carry trades, which should further boost the Japanese yen.

The rise on Friday pushed the yen exchange rate to a cumulative increase of around 3% for the week, making it the best-performing currency among the Group of Ten (G10).

Nomura Securities' forex strategy director Yujiro Goto wrote in a report: "With expectations of an interest rate hike at the Bank of Japan's December meeting, the pressure for a stronger yen is increasing. As momentum from Trump's trade is coming to an end, the pressure for a stronger US dollar has eased, benefiting the yen from the softer dollar."

However, some economists believe that the Bank of Japan may delay further policy tightening until next year, when the impact of US policies on global trade will be clearer.

Chanana from UOB supports this view, suggesting that the Bank of Japan may choose to wait and observe how the US economy and political situation develop before taking any action, reducing the likelihood of a rate hike in December.

The Governor of the Bank of Japan has stated that once US President-elect Trump announces policy details, the Bank of Japan will consider the impact of US policies in its economic outlook.

UOB economists still believe that the Bank of Japan will raise its policy interest rate to 0.5% next month, but they expect this to be the final rate.

UOB stated that economic growth may slow down after entering 2025, and the uncertainty of the inflation path caused by Trump's policies may be enough to keep Udagawa and Otohime on hold for a long time.

Editor/Rocky