BOJ Faces Pressure to Raise Rates Amid Weakening Yen

The Federal Reserve's decision to raise its policy rate by 0.25 percentage point has put pressure on the Bank of Japan (BOJ) to speed up tightening, as the yen weakens due to the widening gap between U.S. and Japanese interest rates.

The yen fell as much as 1% overnight to 156.42 per dollar after the Fed announced the rate increase, reflecting expectations that the U.S.-Japan rate gap will widen further.

Markets expect the BOJ to raise its benchmark rate at its September monetary policy meeting on the 17th and 18th, with a probability of a 0.25 percentage point increase from the current 1% at about 98.2%, according to overnight index swap markets.

Glen Yin, head of research at ACCM, warned that Japan is under enormous pressure to raise rates and deliver a hawkish message to minimize the shock from a weaker yen, adding that 'if it fails to meet market expectations, the risk of a move toward 160 yen in the short term cannot be ruled out.'

The BOJ's push to normalize monetary policy is also strengthening the coupling of the U.S. and Japanese markets, as evidenced by its decision to scrap negative interest rate policy and yield curve control in 2024.