Japan's interest rate outlook and yen rate plummeted, as BoJ insiders said that the market misunderstood Governor Ueda's statement last week.

The US Dollar Index (DXY) only moderately strengthened in the early week (11/December), but USD/JPY soared nearly 1% to touch a new high of 146.50. This situation occurred due to fading hopes for a Japanese interest rate hike soon.

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Bloomberg and Reuters reported that the Bank of Japan (BoJ) thinks there is insufficient evidence to justify ending loose monetary policy this month. Anonymous sources from BoJ insiders also said that the market misunderstood Governor Ueda's statement last week, as there was "no intention to give any signal about the timing of policy changes".

BoJ officials are said to be worried about weakening consumption. Companies may be encouraged to lower prices again if consumption weakens and prevent interest rate hikes.

The series of news immediately eroded market expectations for a Japanese interest rate hike, while dropping the yen's exchange rate against various other major currencies. EUR/JPY jumped almost 1% to 157.60s. GBP/JPY even rallied around 1.3%. USD/JPY and yen crosses are likely to continue to be volatile as market participants recalculate the outlook for Japanese interest rates next year.

"This isn't surprising," said Simon Harvey, head of FX analysis at Monex Europe. "It just goes to show there isn't a free lunch when it comes to speculating on the Bank of Japan."

"We think that January poses a more opportune moment rather than December. Next week's meeting is going to come in thinner liquidity positions, there isn't as much space to follow up in terms of navigating markets through the change in conditions."

Analysts from ING have a different view. According to them, the BoJ may only raise interest rates from June next year by giving advance warning to the public.