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The Japanese Yen rallied on Thursday as investors prepared for an interest rate hike at the Bank of Japan.

The Pound to Yen exchange rate dropped 0.70% to 189.53 after Bank of Japan policy board member Hajime Takata said the Bank should start discussing details of a possible exit from its Negative Interest Rate Policy (NIRP).

"Achievement of our price goal is finally coming into sight," he said in a speech, referencing his belief that inflation in Japan can start trending closer to 2.0%.

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The development firmed market bets for an interest rate rise in H1 2024, which underpinned Japanese bond yields and the currency.

The Dollar to Yen exchange rate is 0.66% lower on the day at 149.70, the Euro to Yen exchange rate is 0.64% lower at 162.28.

"We expect monetary policy divergence between the FOMC and BoJ to lead to a narrowing in interest rate differentials and pull USD/JPY down," says Carol Kong, a foreign exchange strategist at Commonwealth Bank.

Takata's 'hawkish' comments encouraged the market to increase pricing for a 10bp rate hike at the April meeting to 82%.

He said the Bank would have to discuss flexible actions, including scrapping yield curve control (a type of quantitative easing) and NIRP.

The Japanese economy is entering a cycle of rising wages and prices, said Takata, shifting away from "a chronic deflationary cycle".

Markets and the Bank of Japan will now watch the outcomes of the annual wage negotiations, with major companies expected to announce plans in mid-March.