This week, the U.S. Federal Open Market Committee (FOMC) and the Bank of Japan (BOJ) will hold consecutive monetary policy meetings. Most foreign exchange market experts believe that the recent strength of the yen is unlikely to continue through the end of the year. The BOJ's upcoming rate hike is largely priced in, and the pace of future increases is expected to influence the exchange rate. Even if rates are raised, a cautious approach to further hikes could lead to a rise in the yen-dollar exchange rate.
The Nikkei reported on September 14 that in a survey of 14 foreign exchange market participants, about 80%, or 11 respondents, expect that even if the yen strengthens in the short term, the yen-dollar exchange rate will be higher than the recent low of around 152 yen by year-end. On that day, the yen-dollar exchange rate fluctuated in the 154 yen range. All respondents predicted that the BOJ would raise its policy rate from the current 1% to 1.25% at its monetary policy meeting on September 17-18.
Consequently, market attention is shifting from whether the rate will be raised to when the next increase will occur. BOJ Governor Kazuo Ueda stated at a press conference on September 1 that he would discuss rate hikes at every monetary policy meeting. The following day, Policy Board member Hajime Takata emphasized the need for flexibility in rate adjustments, suggesting a departure from the previous approach of raising rates by 0.25% approximately every six months. This was interpreted by the market as a signal that the pace of increases could accelerate.
However, some analysts noted that Ueda's comments were not particularly new. The Nikkei pointed out that when BOJ Deputy Governor Ryozo Himino made similar remarks the previous week, it did not lead to a strengthening of the yen. U.S. Treasury Secretary Scott Vessenet expressed strong support for Japan taking decisive actions on both market and monetary policy to correct the yen's excessive undervaluation, which the Nikkei analyzed as a factor that prompted the market to respond with yen buying following Ueda's remarks.
Inno Deppei, chief analyst at Mitsubishi UFJ Bank, believes that if Ueda mentions that the decision on further rate hikes will be made at each meeting, including the next one, expectations for an October hike will rise, leading to yen buying. Conversely, Hirofumi Suzuki, chief foreign exchange strategist at Mitsui Sumitomo Bank, warned that if the BOJ maintains a cautious stance on further hikes, the yen could weaken again. In fact, after the negative interest rate was lifted in March 2024 and following a rate hike in December 2025, Ueda's comments were interpreted as leaning towards monetary easing, causing the yen-dollar exchange rate to rise.
The voting of policy board members will also be a point of interest. Akira Moroga, chief market strategist at Aozora Bank, predicted that if Takata or Naoki Tamura, who are in favor of rate hikes, propose an increase of 0.5%, double the market expectation, the yen-dollar exchange rate could drop by about 1 yen. On the other hand, Daisaku Ueno, chief foreign exchange strategist at Mitsubishi UFJ Morgan Stanley Securities, suggested that if no significant hike proposals are made and opposition to rate increases grows, the yen-dollar exchange rate could rise. In the June meeting, member Doichiro Asada, who favors monetary easing and active fiscal policy, opposed the hike.
Despite expectations for a BOJ rate hike, concerns about rising prices due to high oil prices and the possibility that the BOJ's rate increases may lag behind are contributing to forecasts of yen weakness by year-end. Toru Sasaki, chief strategist at Fukuoka Financial Group, noted that if inflationary pressures from high oil prices persist, concerns about the BOJ's rate hikes falling behind will grow, highlighting the potential for an expanding trade deficit. As a result, he suggested that the recent strength of the yen may wane, with the yen-dollar exchange rate possibly reaching 160 yen.
There are also analyses suggesting that the yen's strength could limit further gains. Junya Tanase, chief foreign exchange strategist at JPMorgan Chase, pointed out that if the yen strengthens, the burden of import prices decreases, which could reduce expectations for accelerated BOJ rate hikes. If the urgency to raise rates diminishes, the momentum that has recently driven yen buying could weaken.
The upcoming FOMC meeting on September 15-16 is another variable. According to the Nikkei, following the release of the U.S. Consumer Price Index (CPI), the probability of a Fed rate hike in September reflected in the futures market has risen from about 70% to over 90%. Among survey respondents, expectations for a hike were prevalent. However, Shinichiro Kadota, head of foreign exchange and bond research at Barclays Securities, noted that since the market has already priced in much of the U.S. rate hike, its impact on the yen-dollar exchange rate is likely to be limited.
On September 8, Secretary Vessenet stated, "I have asymmetric information," indicating that he is now in control of the situation, which helped curb yen selling. The market interpreted this as him possessing information that others do not, contributing to yen buying. Experts have mentioned the possibility of multiple BOJ rate hikes or an increase in the yen asset allocation by Japan's Government Pension Investment Fund (GPIF), but the specifics of what information Vessenet referred to remain unconfirmed.
Conversely, there are also forecasts that the yen will continue to strengthen. Shusuke Yamada, chief Japan foreign exchange and interest rate strategist at BofA Securities, predicts the yen-dollar exchange rate will be 149 yen by year-end. He believes that as Japan's balance of payments improves, structural factors contributing to yen weakness will ease, and if the BOJ accelerates the pace of rate hikes, the exchange rate will decline further.
A scenario of yen strength based on a sharp drop in stock prices has also been proposed. Osamu Takashima, currency strategist at Citigroup Securities, explained that overseas investors have been buying Japanese stocks while hedging currency risks, leading to a rise in stock prices that has driven yen depreciation. He warned that if stock prices plummet, this trend could reverse, resulting in strong yen buying pressure and potentially pushing the yen-dollar exchange rate below 150 yen.
* This article has been translated by AI.
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