06:36 AM EST, 12/19/2024 (MT Newswires) -- The yen (JPY) has been hit the hardest amongst G10 currencies by Wednesday's United States Federal Reserve hawkish policy update, said Mitsubishi UFG.

The yen sell-off extended further overnight after the Bank of Japan's latest policy update. USD/JPY climbed back above 156.00 to a high at the start of the European trading session of 156.78.

The yen has been undermined further by the BoJ's reluctance to tighten policy when the policy rate was left unchanged as expected at 0.25% overnight, stated MUFG in a note to clients. In the accompanying press conference, Governor Kazuo Ueda reiterated that the BoJ would raise rates further if the economic outlook is realized but added that the central bank needs more information on wage hikes and wants to see the impact of U.S. policies.

The BoJ will be watching closely momentum toward next spring's wage talks. The timing of the next rate hike remains data-dependent, pointed out the bank. The governor expressed the view that recent economic data was broadly in line with the BoJ's outlook although it wasn't sufficient to encourage another rate hike as soon as at Wednesday's overnight meeting.

More importantly, Governor Ueda refrained from sending a strong signal that the BoJ is planning to hike rates at the next policy meeting on Jan. 24, added MUFG. Ueda only added that there will be a certain amount of information available by the next meeting while emphasizing that the full picture on the wage trend will be clear in March or April.

With Donald Trump's second presidential term not starting until Jan. 20, the BoJ won't have much time to assess the impact of U.S. policies by the next policy meeting, noted the bank. The governor finished off by saying that he can't say if it will have enough info by the next policy meeting.

Overall, the comments from Governor Ueda will push back expectations for the timing of the next BoJ rate hike from January to March, according to MUFG. It has provided a green light for speculators to rebuild short yen positions and increases the likelihood that USD/JPY will rise back up toward year-to-date highs at just above the 160.00 level.

A much weaker yen could then become a factor early next year that encourages the BoJ to hike rates sooner in January rather than wait until March. According to Bloomberg, the probability of a January hike has fallen to closer to 50:50 after the overnight policy update.