BoJ Rate Hike Path Key to Sustained Yen Recovery
The recent Japanese yen intervention, backed by US involvement, has not completely reversed the currency's weakness against the US dollar. USD/JPY is near 159 after retracing about 40% of its decline from the pre-intervention high of 164 to the post-intervention low near 155.50.
OCBC's Sim Moh Siong and Christopher Wong believe that for a sustained yen recovery, the Bank of Japan (BoJ) must adopt a more aggressive rate hike path. If this happens, combined with domestic capital flows back into Japanese assets, it could drive a more substantial JPY rebound.
The BoJ's decisions on interest rates are crucial to the yen's stability. The market currently prices around a 60% probability of a September hike, which could lead to upward pressure on both USD/JPY and long-end JGB yields if rates remain unchanged.