BoJ Hike Expectations Fail to Boost Japanese Yen

The Japanese Yen (JPY) has shown only a modest reaction to rising expectations of a September Bank of Japan (BoJ) interest rate hike. According to OCBC's Sim Moh Siong and Christopher Wong, a sustained JPY recovery is unlikely without clearer signs of faster policy normalisation.

The market-implied odds of a BoJ rate hike in September have increased sharply to 75%, up from 60% a week ago, following reports that the Takaichi administration supports an early BoJ rate hike. This has led to growing alignment between the BoJ and the government on addressing inflation and supporting JPY-buying intervention.

However, despite this shift in expectations, the JPY's response has been muted. The BoJ is concerned about inflationary pressures from a weak JPY, while the government seeks to enhance the effectiveness of JPY-buying intervention. A more meaningful and sustained JPY recovery will likely require a stronger signal from the BoJ that policy normalisation can proceed at a faster pace.

The CHF remains the preferred funding currency for carry trades, with intervention risks capping USD/JPY near 160. It remains unclear how much appetite the government has for additional rate hikes beyond September or October.