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: the probability of a key interest rate hike by the Bank of Japan at the September meeting is now estimated at 84%. Just two weeks ago, this figure stood at only 22%.
Such a dramatic shift in sentiment occurred after the currency intervention by Japanese authorities stopped supporting the yen. The national currency has lost a significant portion of its recent gains and is heading toward its strongest weekly decline in three months.
The effect of the intervention is weakening
This week, the yen fell by about 1% to 159.43 per dollar. This is the worst weekly result since May. The currency has given back roughly half of what it regained after the joint intervention by the Bank of Japan in late July and early August. Before these measures, the exchange rate held around 164 per dollar.
A similar picture emerged earlier. After the April intervention, the yen again approached a 40-year low in the following months. This suggests that one-off measures are unable to change the long-term trend.
Notably, Tokyo's former top currency diplomat Mitsuhiro Furusawa noted that authorities could tap currency reserves again at any moment. According to him, officials are also ready to signal a faster rate hike to support the currency.
Traders are betting on a rate hike
The link between intervention and key rate decisions explains the shift in market expectations. Polymarket participants estimate the probability of a quarter-point rate hike by the Bank of Japan at above 80%.
OCBC strategist Sim Moh Siong believes that interventions alone will not break the dynamics of the Japanese currency. "It's no surprise that the yen has given up ground again," he said. In his assessment, the yen needs clear support from the Bank of Japan, which is ready to tighten monetary policy. This view aligns with growing expectations of a faster rate hike, as inflation approaches the target level.
The opposite scenario carries risk: the regulator may leave the rate unchanged, and then the market will quickly react with disappointment. After such decisions, the yen has already fallen to 160 per dollar. Market participants are now counting on central bank steps rather than new currency interventions.
My analysis: the market is clearly shifting responsibility for the yen's fate from tactical interventions to fundamental monetary decisions. This is the right signal, but it also makes the September BOJ meeting critically important—any deviation from expectations will trigger sharp volatility, not only in the USD/JPY pair but also in global markets, including the cryptocurrency market.