06:33 AM EST, 02/05/2025 (MT Newswires) -- The yen (JPY) is up 2.7% so far this year making it the top-performing G10 currency, said Mitsubishi UFG.

The Bank of Japan hike in January continues to have an impact in shifting investor expectations on the outlook for BoJ policy this year, which is helping narrow rate spreads and fuel appetite for USD/JPY selling, even when risk appetite is favorable and volatility is low, stated MUFG.

One-month volumes remain below 10%, levels not seen since July last year before the BoJ-triggered turmoil sent USD/JPY sharply lower and volumes higher, wrote the bank in a note to clients. The two-year U.S.-Japan bond yield spread on Wednesday hit the lowest level since October last year.

The latest catalyst for yen buying was the much stronger wage data released Wednesday, pointed out the bank. The data was notably stronger than market expectations -- total cash earnings jumped 4.8% yer over year. The consensus was 3.7%.

This was driven by winter bonuses, with 'special cash earnings' surging 6.8%. Data that removes distortions related to survey sample changes and stripping out bonuses -- base salaries for full-time workers -- increased by 2.8%, which is around the levels the BoJ believes are consistent with price stability.

The wage data is strong as Japan approaches the 'shunto' wage negotiation period that the BoJ believes will confirm another year of solid wage increases, added MUFG.

The data comes just after the BoJ hiked rates in January so it will have limited impact on near-term rate expectations, noted the bank. However, the data still argues that the BoJ could certainly hike on two more occasions this year, which is certainly not priced.

The dynamics are changing in the JPY market and narrowing spreads can continue, encouraging increased yen-buying hedging and discouraging speculative yen selling. Selling USD/JPY on rallies increasingly makes "sense," according to MUFG.