06:34 AM EDT, 08/05/2025 (MT Newswires) -- The yen (JPY) is broadly stable after advancing sharply versus the US dollar (USD) following the much weaker-than-expected United States jobs data on Friday, said MUFG.

Since the close on Thursday, the yen is by some distance the best-performing G10 currency, advancing by around 2.5%, wrote the bank in a note to clients. The yen on Thursday had weakened sharply in the aftermath of what was a dovish press conference from Bank of Japan Governor Kazuo Ueda after the BoJ left rates unchanged and failed to provide any explicit guidance on the prospect of a rate hike.

The minutes from the previous meeting before last week's were released on Tuesday and understandably, at that time in June, the ability to provide clarity on policy direction was difficult given the uncertainty related to trade, stated MUFG.

The minutes did show that in the scenario of trade uncertainties de-escalating, the BoJ would consider a rate hike. While trade uncertainties haven't fully de-escalated, and probably never will, the outlook is certainly a little clearer and while the yen has strengthened due to the jobs data, the broader market conditions haven't been disrupted by the trade deals and tariffs agreed with the U.S., pointed out the bank.

This could well result in building pressure on the BoJ to consider a rate hike if there is no further substantial strengthening of the yen which would certainly alleviate inflation concerns.

The pressure to hike could also come from a wish to help support and stabilize the Japanese government bond (JGB) market, added MUFG. Tuesday, a 10-year JGB auction indicated weaker demand with the bid-to-cover at 3.06, below 3.51 at the last auction and the 12-month average of 3.17.

The tail came in wider at 0.14 as well, compared with 0.03 at the last auction. The minutes from the June BoJ meeting also included comments expressing concern over market stability by cutting JGB purchases too quickly.

JGB yields are lower still on Tuesday in part on increased expectations of weaker global growth due to President Donald Trump's tariffs and the weak U.S. jobs data and the stronger yen, noted the bank. However, domestically, Japan remains where inflation risks look more elevated, especially given the limited appreciation of the yen.

But JGB market instability remains a downside risk for the yen, according to MUFG. Prime Minister Shigeru Ishiba on Monday hinted at the possibility of another fiscal stimulus package. Questioned in the Diet on the issue, PM Ishiba stated he would consider tax cuts and additional spending if required and after consulting opposition parties.

Given the main opposition parties ran Upper House election campaigns on increasing fiscal spending to help households, another fiscal spending plan seems likely. The size and whether additional JGB issuance would be required will be "important."

However, even if no additional issuance is required, it still could unsettle the JGB market and bring back appetite to sell the yen, said the bank. The broader US dollar performance is certainly more impressive than expected, given the 28bps plunge in the two-year U.S. Treasury note yield on Friday that points to a market that is still working through the liquidation of short US dollar positions.

Given the outperformance of JPY, the build-up of short JPY positions may well now be largely cleared, it added.