The market is pricing in an 84% probability of a rate hike by the Bank of Japan: what lies behind the sharp reversal
The Polymarket deposit platform is recording a dramatic shift in market sentiment: traders now price an 84% probability of a rate hike by the Bank of Japan at the September meeting. Just two weeks ago, this figure stood at only 22% — such a rapid reversal in expectations deserves close attention.
Why the yen is weakening again
The key trigger is the loss of effectiveness of Japanese authorities' currency interventions. This week, the yen fell by about 1% to 159.43 per dollar, marking its worst weekly performance since May. In essence, the currency has given back nearly half of the gains that followed the coordinated intervention by the Bank of Japan in late July and early August, when the exchange rate was held around 164 per dollar.
This is not the first time that one-off measures have failed to deliver long-term results. A similar pattern was observed after the April intervention: the yen then slid back to a 40-year low over the following months. The market is beginning to understand that targeted liquidity injections do not solve structural problems.
Betting on monetary policy
Notably, Tokyo's former top currency diplomat Mitsuhiro Furusawa has publicly acknowledged the possibility of using currency reserves again at any time. However, according to him, the regulator is also ready to signal faster rate hikes to support the national currency. It is precisely this signal that the market is now pricing into quotes.
OCBC strategists agree that interventions alone will not reverse the yen's dynamics. A sustainable recovery requires clear support from the Bank of Japan, which is willing to tighten monetary policy. Inflation in the country is gradually approaching the target level, creating room for such decisions.
Risks of the reverse scenario
The reverse scenario carries significant risks. If the regulator leaves rates unchanged, the market will quickly react with disappointment — the yen has already shown declines to 160 per dollar after similar decisions. Traders are now betting specifically on central bank moves, not on new currency interventions.
My view: The market is likely right in its assessment — the Bank of Japan will have to act more decisively to stop the yen's depreciation. However, pricing in an 84% probability is optimistic. The central bank may choose an intermediate option: keeping rates unchanged but delivering a hawkish signal for the future, which would leave room for maneuver and avoid sharp movements.