06:40 AM EDT, 06/03/2025 (MT Newswires) -- After briefly hitting a high of 146.28 last Thursday, USD/JPY has since fallen back close to last month's lows at just above the 142.00 level, said MUFG.

At the same time, the long end of the Japanese government bond (JGB) market has been consolidating at higher yields after last month's sell-off, wrote the bank in a note to clients. The 30-year JGB yield has been trading just below 3.00% ahead of the 800 billion yen auction of 30-year JGBs on Thursday.

The ministry of finance (MoF) held an auction overnight Monday for 10-year JGBs at which it sold 2.6 trillion yen. The bid-to-cover ratio picked up to 3.66 compared with the average over the past year of 2.54, indicating stronger demand, stated MUFG. Speculation has increased recently that the MoF may adjust debt sales after it sent a questionnaire to market participants asking their views on issuance and the current situation.

Bloomberg has also reported overnight Monday that a draft of the government's annual fiscal policy plan emphasized the need to increase domestic JGB holdings but didn't clarify how exactly more government bonds should be held by domestic investors. The government's goal for achieving a primary budget surplus has been delayed to fiscal year 2025 or 2026.

At the same time, there has been building speculation that the Bank of Japan (BoJ) could adjust its JGB tapering plans to help ease upward pressure on yields at the long end of the curve, added MUFG. The BoJ is expected to announce its bond purchasing plans for April 2026 onward at its upcoming policy meeting on June 17.

BoJ Governor Jazuo Ueda told parliament overnight Monday that "many opinions indicated that it's appropriate to continue cutting bond purchases while balancing predictability and flexibility" when summarizing views expressed by bond market participants. The governor also indicated that the BoJ will keep the existing plan for cutting bond purchases by 400 billion yen/quarter through to March of next year, by saying there were "limited" views demanding a revision.

In addition, the governor stated that "we have no intention to make room for future rate cuts by forcibly raising our policy rate when we can't expect improvement in the economy and inflation."

MUFG isn't expecting the next BoJ hike until later this year. Delayed BoJ hikes aren't sufficient in the bank's view to prevent the yen (JPY) from strengthening further.