06:22 AM EST, 01/02/2025 (MT Newswires) -- Japan's yen (JPY) has been recovering lost ground at the start of the year resulting in USD/JPY dropping back towards 156.50 overnight Wednesday after hitting a high of 158.08 last Thursday, said MUFG.

The pair has struggled to break above resistance at the 158.00 level in recent weeks, wrote the bank in a note to clients. The price action also coincides with United States yields losing some upward momentum.

The two-year U.S. Treasury yield failed to break above resistance from the 200-day moving average which comes in at around 4.35% and has dropped back towards 4.20%, while the 10-year UST yield has run into resistance at around 4.60%, stated MUFG.

Japanese officials will welcome the loss of upward momentum for USD/JPY after expressing more concern over yen weakness over the holiday period as the pair moves back closer to last year's highs at just above the 160.00 level, pointed out the bank. While verbal intervention is never likely to reverse the yen weakening trend on its own, it has helped to at least temporarily slow the pace of the yen's decline.

If the yen continues to weaken it could also increase pressure on the Bank of Japan to hike rates sooner this year in January rather than wait until March as indicated by Governor Kazuo Ueda at last month's policy meeting, noted MUFG.

The Japan Times is running a report Thursday stating that the BoJ is expected to raise rates two or three times this year possibly taking the policy rate up to 1.00% for the first time in three decades according to economists in Japan.

A Market News report released at the end of last year raised some doubts about the willingness of the BoJ to hike rates as far as 1.00%. MNI reported that officials at the BoJ fear that the real neutral rate of interest could be even lower than the previously estimated range of -1.00% to +0.5%. The report states that the BoJ's former estimate of the neutral rate was only based on data until Q1 2023.

Overall, the BoJ's continued caution over raising rates further will continue to encourage speculative selling of the yen especially while the U.S. Federal Reserve has become more reluctant to cut rates further, according to the bank.