BoJ Rate Hike Hangs in Balance as Traders Pin Hopes on September Decision

A sharp rebound in the USD/JPY currency pair is stalling just below 160, as traders await a Bank of Japan (BoJ) rate hike to close the interest rate gap driving the yen carry trade.

Last month's joint US-Japan intervention was successful in rescuing the yen from falling to lows not seen in decades. However, this rebound is likely due to an informal understanding that the US would support the yen in exchange for Japan's central bank being given room to raise interest rates.

The interest rate gap between the US and Japan has created a 'carry trade' opportunity for investors to borrow cheaply in yen and buy assets with higher returns. A BoJ rate hike would close this gap, making the carry trade less attractive.

A government source reported that Prime Minister Sanae Takaichi's government now supports the BoJ raising rates soon, possibly as early as September or October. This shift in policy could provide the necessary political cover for the central bank to move faster and raise interest rates.