USD/JPY Struggles Below 158 as BoJ Rate Hike Odds Dim

The USD/JPY pair remains stuck below the 158 mark as of October 5, with minimal intraday volatility. Market expectations for another interest rate hike by the Bank of Japan (BoJ) in October have been slashed by about half, according to recent meeting minutes. The BoJ's September 18 rate increase, which raised the policy rate from 1% to 1.25%, marked the highest level in over 31 years. However, the yield spread between the U.S. and Japan has not yet converged, leaving the USD/JPY pair weak.

Governor Kazuo Ueda emphasized that the policy focus has shifted to preventing inflation from overshooting the 2% target. Despite this, the market now views a December rate hike as more likely than an October move. Tokyo's inflation and August wages, which showed a 4.7% year-on-year gain, remain critical factors in shaping BoJ policy. Internal disagreements within the BoJ continue to limit the yen's appreciation.

The Federal Reserve's September 16 rate hike, which increased the target range to 3.75%, 4%, has kept the interest rate differential between the U.S. and Japan significant. The USD/JPY pair weakened after the BoJ's rate hike and has struggled to break above 158. U.S. employment data has been soft, with nonfarm payrolls increasing by just 29,000 in September, well below expectations. The unemployment rate edged up to 4.2%, and average hourly earnings grew modestly.

Joint intervention by U.S. and Japanese authorities in late July to support the yen has altered market positioning. The likelihood of future interventions could increase if the USD/JPY pair surpasses 160. However, the medium-term trajectory of the yen will depend on the pace of policy-rate adjustments and Japan's ability to sustain wage and inflation growth. Fiscal expansion and trade deficits in services and digital sectors pose additional challenges for the yen's revaluation.