07:13 AM EDT, 05/08/2024 (MT Newswires) -- The Japanese yen underperformed other major currencies ahead of the North American open on Wednesday as US bond yields edged higher and the Bank of Japan's outlook for interest rates left investors disappointed.

Governor Kazuo Ueda told the Yomiuri International Economic Society meeting in Tokyo on Wednesday that the BoJ expects a virtuous cycle between wages and prices is increasingly expected to become the dominant driver of inflation in Japan.

Underlying inflation is now expected to rise to a level that is consistent with the 2% target in the second half of the latest projection period as a result, and this could mean that a further upward adjustment in interest rates will soon be warranted.

"If the outlook for prices is revised upward or if upside risks become high, it will be appropriate for the bank to make an earlier adjustment of the policy interest rate," Governor Ueda said.

"On the other hand, if the outlook is revised downward or downside risks increase, it will be necessary for the bank to maintain the current accommodative financial conditions for a longer period," he added.

Ueda also said Wednesday that it's necessary "to be aware that, compared to the past, exchange rate developments are more likely to affect prices," implying that continued weakness in the yen could lead to a faster increase in interest rates.

USD/JPY traded 0.37% higher at 155.34 following the speech as the commentary appeared to fall flat in financial markets where US government bond yields were edging higher again for a third day running, pressuring the yen. The two-year US yield was trading around 4.87% ahead of the North American open, up 0.10%, while the 10-year yield was up 0.49% to 4.48%.

"Underlying inflation in Japan is in a firm downtrend with core CPI dropping to a 16-month low of 2.9% y/y in March. As such, the BOJ tightening cycle will likely remain modest and a drag on JPY," said Elias Haddad, a senior markets strategist at Brown Brothers Harriman.

USD/JPY has now gained around 35% since the Federal Reserve first began raising interest rates in March 2022, and was more than 40% higher than in June 2021 when the Fed first began to signal a hawkish shift in its post-pandemic monetary policy stance.

The weakness of the yen has already led to multiple interventions from Japan's Finance ministry.