BOJ Faces Stakes-Raising Test as Yen Weakens Further

The Bank of Japan (BOJ) faces increased pressure to support the yen after the US Federal Reserve's hawkish interest rate hike. Strategists expect a 25 basis point increase at this week's BOJ meeting, but the stakes are high as the currency could weaken further unless officials convince markets that more tightening is coming.

The Fed lifted borrowing costs on Wednesday and projected further increases, prompting traders to price three additional hikes by next year. This threatens to keep the US-Japan rate gap wide, even as the BOJ is expected to raise its own policy rate this week.

Glenn Yin, director of research at ACCM in Melbourne, noted that Japan 'is certainly facing an enormous amount of pressure to both hike and deliver a hawkish message to minimise the damage.'

The yen weakened as much as 1 per cent overnight to 156.42 per dollar after the Fed move, reversing a sharp rally earlier this month.

Rinto Maruyama, senior rates and FX strategist at SMBC Nikko Securities, sees higher oil prices providing policymakers with further justification for tighter policy.