Yen Weakness Could Send Dollar-Yen Rate Soaring Towards 160

The yen resumed its decline after the Federal Reserve's hawkish rate increase, with markets now focusing on the Bank of Japan's policy decision on September 18. The dollar-yen exchange rate has touched 156.42 per dollar, and strategists warn that even a 0.25 percentage-point hike by the BOJ may not be enough to narrow the rate gap between the US and Japan.

Markets are pricing in three more Fed rate hikes by the middle of next year, which could fuel yen weakness and drive the dollar-yen rate towards 158 or even 160 per dollar. The key question is how hawkish BOJ Governor Kazuo Ueda will be on further hikes after the decision.

Glenn In, research director at ACCM, said Japan is under heavy pressure to raise rates while delivering a hawkish message to limit yen weakness. Rinto Maruyama, chief rates and foreign-exchange strategist at SMBC Nikko Securities, noted that rising oil prices could strengthen the case for BOJ tightening.

However, the odds of a 0.50 percentage-point increase or back-to-back hikes are seen as limited due to concerns about bringing Japan's policy rate into the estimated neutral-rate range. Akira Moroga, chief market strategist at Aozora Bank, said a rate increase alone may not be enough to support the yen if the BOJ does not strike a hawkish stance.