The market is pricing in an 84% probability of a rate hike by the Bank of Japan in September.
Participants in the decentralized prediction market Polymarket have sharply shifted their expectations regarding Japan's monetary policy. In just two weeks, the probability of the Bank of Japan raising its key interest rate at the September meeting has surged from 22% to 84%. This signals a dramatic reversal in trader sentiment, with growing skepticism about the effectiveness of currency interventions and increasing confidence in decisive action from the regulator.
Why the yen is weakening again
The trigger for the revised expectations was the rapid depreciation of the Japanese currency. This week, the yen lost about 1% against the dollar, falling to 159.43. This is the worst weekly performance since May of this year. Notably, the currency has already given back roughly half of the gains it made following the coordinated currency intervention by Japanese authorities in late July and early August. Before those measures, the exchange rate was holding near 164 yen per dollar.
History is repeating itself: after the April intervention, the yen also returned to its lows over several months, updating 40-year levels. This confirms that one-off measures without a change in fundamental policy cannot reverse the trend. Tokyo's former top currency diplomat Mitsuhiro Furusawa recently stated that authorities are ready to deploy currency reserves at any moment, yet the market is increasingly unresponsive to such signals.
Betting on tightening
The key shift in expectations is tied to traders now betting not on new interventions, but on an actual interest rate hike. OCBC strategist Sim Moh Siong rightly notes that the yen needs clear support from the Bank of Japan, which is ready to tighten monetary policy. Inflation in the country is approaching the target level, creating conditions for rate normalization.
Risks to this scenario remain: if the regulator leaves the rate unchanged, the market could react with sharp disappointment, and the yen would once again head toward 160 per dollar. However, the current dynamics of forecasts indicate that market participants expect decisive steps from the central bank, rather than more targeted interventions.
My view: The prediction market often leads traditional analyst surveys, and the sharp jump in probability to 84% is a strong signal. However, the Bank of Japan has historically been cautious, and if the regulator fails to meet expectations, volatility in the currency market could spike sharply, creating additional risks for all risk assets, including cryptocurrencies.