Bank of Japan Rate Hike Odds Rise as Yen Weakness Persists
The Bank of Japan (BoJ) faces growing market speculation about its next policy move, with futures pricing a roughly 26% chance of a rate hike on October 30. Despite Governor Kazuo Ueda's indication that the BoJ will continue raising rates, the policy gap between the BoJ and the Federal Reserve remains wide. The Fed's range stands at 3.75%, 4.00%, while the BoJ's rate is at 1.25%, leaving a 2.75 percentage-point spread unchanged after recent hikes.
The yen has weakened following each BoJ rate adjustment, with USD/JPY nearing 160.00 in June and dipping below 164.00 by late July. The Ministry of Finance intervened on July 30 to support the currency. After the BoJ's September 18 hike, passed 7-2, the pair hovered near 157.00 before climbing to 159.00 within a week.
Attention is now focused on the BoJ's October 29-30 report, where the market will seek guidance on the pace of future rate hikes rather than the decision itself. Tokyo's core CPI rose 2.7% year-over-year in September, up from 1.8% in August and exceeding forecasts of 2.4%. The measure excluding fresh food and energy increased 3%, a 13-month high, despite gasoline subsidy adjustments.
Reuters sources suggest the report may bring forward the timing for underlying inflation to reach 2%, compared with a July projection spanning October 2026 to March 2028. Futures also price in a 26% chance of an October hike, with expectations of one move by December and a policy rate of 2.02% by September 2027.
Technical levels indicate that the 157.00 support level on USD/JPY is critical as central bank meetings approach. The pair has been consolidating between 156.50 and 159.00, near its 50-day and 200-day exponential moving averages at 158.00. A sustained close below 157.00 could signal a deeper slide toward 155.00 or the September low of 153.00.
Traders are also preparing for the Federal Reserve's policy decision on October 28, which could alter the currency gap. While futures show only a 20% chance of a Fed rate hike following September's modest payroll growth, upcoming US inflation data on October 14 will be a key catalyst. Derivative strategies favor short positions on USD/JPY if it breaks below 157.00, targeting a move down to 153.00, but a failure to signal faster hiking could push the pair back to 159.00 or 160.00.