Societe Generale points out that Japanese core inflation surged to 4.1% in April, the highest level since 1981. This uptick resulted in a slight increase in Japanese Government Bond (JGB) yields, and the yen gaining by 0.4%, with SocGen projecting more movement to come.

The bank notes that while USD/JPY doesn't always track bond yield trends, it generally does, and in the current cycle, both 10-year Note yields and USD/JPY reached their peak on October 21. Although the peak for Fed Funds remains uncertain, SocGen doubts that 10-year yields will approach those highs again.

However, with the Bank of Japan's (BOJ) yield curve control bands potentially changing soon, the JGB side of the equation is becoming increasingly important. In the wake of the December increase in the upper band from 25bp to 50bp, 10-year yields spiked by 25bp. SocGen anticipates the BOJ will increase the upper limit of its 10-year JGB range by 50bp to 1% at its June 16 meeting, which could push USD/JPY close to 130.