BOJ heading for another rate hike: The yen keeps falling anyway

From outsider call to consensus in one month

In the space of a single month, the outlook for the Bank of Japan's (BOJ) September meeting has shifted completely. In July, only 5 percent of surveyed economists expected a rate hike as early as September. That figure now stands at 57 percent, according to a recent Reuters survey cited by ForexLive/InvestingLive.

The BOJ raised its policy rate to 1 percent in June – the highest level in three decades – and the central bank is now weighing a faster pace of hikes than the historical pattern of roughly two increases per year, according to earlier Reuters reporting.

The terminal rate moves higher and sooner

The shift is not just about the timing of the next hike. Nearly two-thirds of the 54 analysts who responded to a related question now expect the policy rate to reach at least 1.50 percent by the end of the first quarter of 2027 – three months earlier than the previous survey indicated. Around 60 percent see the rate at least 1.75 percent by the third quarter of 2027. Half now point to 1.75 percent as the ultimate peak, compared with just 19 percent a month ago.

JPMorgan Securities' chief Japan economist Ayako Fujita warns, according to the survey, that a delay in September could itself destabilise markets that have already positioned for a hike. The cost of waiting has therefore become high on both sides.

A September rate hike has become unavoidable – delaying it now risks destabilising markets that have already positioned for it.

Currency intervention: Too little, too late

Behind the accelerated pace of hikes lies a yen that has proven remarkably resistant to policy measures. Japan and the United States carried out a rare coordinated currency intervention in August – the first since 1998 – after the yen fell to 40-year lows. Research sources suggest Tokyo deployed around $59 billion in currency operations in connection with this, including nearly $32 billion in the space of a single week.

Nevertheless, 18 of 26 economists in the survey – more than two-thirds – described the intervention as largely or entirely ineffective, characterising it as something that has delayed rather than resolved the underlying pressure on the currency.

Takaichi's fiscal policy pulling in the wrong direction

Another key finding in the survey is that Prime Minister Sanae Takaichi's fiscal policy is seen as an independent driver of yen weakness. As many as 89 percent of respondents – 25 out of 28 – believe her government's approach is amplifying pressure on the currency. The concern centres particularly on planned tax cuts, including a reduced consumption tax on food, and uncertainty over how these will be financed.

Nomura Securities' chief economist Kyohei Morita points out, according to the survey, that fiscal policy is raising inflation expectations and reinforcing the impression that the BOJ is falling behind the curve. A cut in the consumption tax without clear financing would, according to Morita, risk accelerating yen depreciation further – partly by prompting foreign investors to sell Japanese government bonds.

A binary risk event for JPY pairs

For currency traders, the September meeting presents a binary event. According to the ForexLive analysis, a confirmed hike will do limited good for the yen, while a surprise pause could trigger sharp yen selling given how quickly consensus has shifted. MUFG views the risk for the yen as skewed toward further weakness despite the market pricing in an 80 percent probability of a hike.

Additional pressure is coming from outside: according to the ForexLive source, an appeal from U.S. Treasury Secretary Scott Bessent reportedly helped bolster market expectations of a September hike – underscoring the diplomatic dimension of the currency question between Tokyo and Washington.

Ripple effects for risk assets

The trajectory of Japanese interest rates is not without consequences for broader market conditions. Historical data show that BOJ rate hikes since March 2024 have coincided with Bitcoin drawdowns of between 18 and 32 percent, with an average of 27 percent, according to research data. The mechanism is largely tied to the unwinding of yen-funded carry trade positions, where investors sell risk assets to repay yen-denominated loans as borrowing costs rise or the currency strengthens.

With the September meeting now just around the corner, Japanese monetary policy will be watched closely not only by currency traders, but across the entire global risk spectrum.