BOJ Rate Hikes Alone Won't Save Yen, Repatriation of Overseas Assets Needed

The Japanese yen has already benefited from market expectations of a Bank of Japan (BOJ) rate hike, with an implied probability of a September increase reaching 85%. However, OCBC Bank FX strategists Sim Moh Siong and Christopher Wong argue that further appreciation may require policy tools beyond rate hikes. They suggest measures to encourage the repatriation of overseas assets to Japan, given the BOJ's constraints on pace and magnitude of rate increases.

Siong notes that a September rate hike would break the pattern of the BOJ's current tightening cycle, where hikes have typically occurred every six months. The interest rate market has already priced in an 85% probability of a September rate hike, along with a faster tightening pace thereafter.

With the short-term policy dividend for the yen seemingly fully priced in by the market, Siong emphasizes that relying solely on interest rate tools may not be enough to reverse the yen's long-term weakness. Encouraging repatriation of overseas assets and coordinating with government-level policies could provide additional support.

Looking ahead, market attention will shift to the BOJ's September meeting, a potential meeting between central bank governor Ueda and Prime Minister Takaichi, and this week's G20 finance ministers and central bank governors' meeting. These events will serve as key windows for assessing the medium-term direction of the yen.