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 revised their expectations regarding the Bank of Japan's monetary policy. The probability of a key interest rate hike at the regulator's September meeting is now estimated at 84%. Just two weeks ago, this figure stood at only 22% — the momentum is impressive and highly telling.
This rapid shift in sentiment is linked to the weakening effect of currency interventions by Japanese authorities. The yen, which had previously shown steady gains following coordinated regulator actions, has begun to lose ground again. This week, the USD/JPY rate rose to 159.43, marking a decline of about 1% for the yen — its worst weekly performance in three months.
The yen gives back its gains
Notably, the Japanese currency has already lost about half of the gains achieved after the joint intervention by the Bank of Japan in late July and early August. At that time, the rate pulled back from the 164-per-dollar level, and the market believed in the authorities' resolve. However, it is now becoming clear that one-off interventions without changes to fundamental policy cannot reverse the trend.
A similar pattern was observed after the April currency interventions: the yen slid back to multi-year lows over several months. Experience shows that the market quickly adapts to regulator actions, and more systematic measures are needed for a sustainable strengthening of the national currency.
Betting on central bank resolve
That is why traders and investors are now betting not on new interventions, but on monetary policy tightening. Market participants expect the Bank of Japan to be forced to raise rates to support the yen. Inflationary pressure in the country is gradually approaching the target level, giving the regulator formal grounds for such a move.
Significantly, Tokyo's former top currency diplomat Mitsuhiro Furusawa recently suggested the possibility of reusing currency reserves at any time. However, he also emphasized that authorities could signal to the market their readiness for a faster rate hike — and it is precisely this signal that market participants are now waiting for.
If the Bank of Japan keeps rates unchanged, the market reaction could be extremely painful. The yen has already shown declines to 160 per dollar after similar disappointments, and a repeat of that scenario is quite likely.
My view: The derivatives market and prediction platforms often overestimate central bank resolve, especially in politically sensitive situations. However, in this case, the tilt toward a rate hike looks justified — the Bank of Japan has found itself in a trap where inaction threatens a new collapse of the yen and imported inflation. The September meeting will be a moment of truth for the Japanese regulator.