06:50 AM EST, 02/20/2025 (MT Newswires) -- The yen (JPY) has continued to outperform this week resulting in USD/JPY falling back to within touching distance of the 150.00 level overnight Wednesday, said MUFG.

The pair is moving closer to the lows from early December when USD/JPY found support between 148.60 and 150.00, wrote the bank in a note to clients. The yen has extended its position as the best-performing G10 currency so far this year. It has strengthened by around 4.8% against the US dollar (USD) and by 4.0% against the euro (EUR) year to date.

The yen is continuing to benefit from the ongoing narrowing of yield differentials between Japan and other major economies, stated MUFG. The yield differential between 10-year United States Treasury bonds and Japanese government bonds has narrowed by around 50bps from a peak of 3.57% in mid-January to the lowest level since before the U.S. election.

The sell-off in the JGB market has accelerated over the past month resulting in the 10-year JGB yield rising to a fresh high of 1.45% overnight Wednesday and it has now more than doubled over the past year, pointed out the bank. The ongoing adjustment higher for Japanese yields has been encouraged by hawkish comments from Bank of Japan officials signaling strongly that further rate hikes will be delivered.

It follows last month's decision to raise rates for the third time in the current tightening cycle up to 0.50%, added MUFG. It was reported overnight Wednesday that BoJ Governor Kazuo Ueda held a regular meeting with Prime Minister Shigeru Ishiba to exchange views on financial and economic developments.

According to reports, the topic of rising yields in Japan wasn't discussed. The focus on the sharp rise in yields in Japan may begin to attract more attention if the current pace of sell-off in the JGB market continues, noted the bank. It's one risk alongside the timing of the Upper House election which could challenge building market expectations for the BoJ to hike rates again as soon as the July policy meeting.

According to Bloomberg, there are currently around 21bps of hikes priced in by the July policy meeting and 15bps by the June meeting.

The case for further rate hikes has been supported by evidence showing that Japan's economy expanded more strongly than expected during the H2 of last year even after the BoJ started to raise rates. The gross domestic product grew by 2.8% quarter over quarter in Q4 following on from growth of 1.7% in Q3.

At the same time, the BoJ has become more confident that stronger wage growth will be sustained in the upcoming fiscal year helping to sustain inflation at its 2.0% target. The BoJ's preferred measure that excludes distortions from sample changes has shown that full-time base pay was increasing by around 3.0% toward the end of last year which Governor Ueda has indicated is consistent with their inflation target.

The next focus points for the BoJ and market participants will be when Rengo (the Japanese Trade Union Confederation) releases the first tabulation results for the 2025 Shunto (spring wage negotiations) on March 14. In advance, Rengo's summary result of wage requests is expected to be released on March 6 providing an insight into what the first tabulation figures may look like, according to MUFG.