USD/JPY Falls as BOJ Rate-Hike Expectations Surge

The USD/JPY exchange rate has been under pressure as investors increasingly expect the Bank of Japan to raise interest rates faster than initially thought. According to market pricing, there is now a 70% chance of a 25bp hike in September and a second move by the December meeting.

US Treasury Secretary Scott Bessent's recent comments have contributed to this shift in expectations. He implied that he has information suggesting Japanese authorities may be preparing further measures to counter persistent yen weakness, and expected Governor Kazuo Ueda to 'do the right thing' with regards to interest rates.

The JGB yield curve has pushed to fresh multi-decade highs, reflecting the market's growing expectation of a faster BOJ rate-hiking cycle. However, despite this, there hasn't been a meaningful flattening further out the JGB curve, leaving the back end vulnerable to another upwards rupture.