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 radically revised 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 soared from 22% to 84%. This is a signal that cannot be ignored: the market no longer doubts the regulator's resolve, but is merely discussing the scale of the move.
The reason for such a sharp reversal was the weakening effect of currency interventions by Japanese authorities. The yen, which strengthened to around 164 per dollar after coordinated actions in late July and early August, has now lost roughly half of its gains. This week, the USD/JPY exchange rate rose by 1%, reaching 159.43—the worst weekly performance since May.
Notably, the yen is repeating the fate of the April interventions: back then, the currency also quickly returned to multi-year lows despite the regulator's efforts. This confirms my long-standing position: one-off interventions without changes in interest rate policy are merely a temporary painkiller, not a cure.
Playing ahead of the curve
The market fully understands this dynamic. Former chief currency diplomat of Tokyo, Mitsuhiro Furusawa, gave a clear signal in his comments: authorities are ready to deploy currency reserves at any moment, but a more effective tool could be an accelerated rate hike. It was this signal, not the interventions themselves, that flipped traders' expectations.
OCBC strategists share this view, noting that the yen needs real support from the Bank of Japan, not targeted injections. With inflation in the country steadily approaching the target level, arguments in favor of policy tightening are growing.
However, the opposite scenario still carries risks. If the regulator leaves the rate unchanged, the yen could instantly plummet to 160 per dollar, as has happened before. Market participants are now betting precisely on the central bank's actions, and the cost of a mistake will be high.
My conclusion: the 84% probability looks overstated, but the direction of movement is clear. The Bank of Japan is cornered: further delay in normalizing the rate will only intensify pressure on the yen and undermine trust in the regulator. The September meeting could be historic.