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 Japan's monetary policy. The probability of the Bank of Japan raising its key interest rate at the September meeting is now estimated at 84%. Just two weeks ago, this figure stood at only 22% — an impressive reversal in market sentiment.
The effect of intervention is fading
The reason for such a sharp change was the actions of Japanese authorities in the currency market, who have stopped supporting the yen. This week, the Japanese currency fell by approximately 1% — to 159.43 yen per dollar. This is the worst weekly result since May of this year.
The yen has already lost about half of the gains it posted after the coordinated currency intervention by the Bank of Japan in late July and early August. Before these measures, the rate was holding around 164 yen per dollar. Notably, similar dynamics have been observed before: after the April intervention, the yen again slid back to a 40-year low over the following months.
Former top Tokyo currency diplomat Mitsuhiro Furusawa notes that authorities are ready to deploy currency reserves at any moment. According to him, officials may also signal to the market a faster rate hike to support the national currency.
Traders bet on a hike
The link between interventions and key rate decisions explains the shift in market expectations. Polymarket participants estimate the probability of a quarter-point rate hike at above 80%. OCBC strategist Sim Moh Siong believes that interventions alone are insufficient to reverse the dynamics of the Japanese currency.
"It's no surprise that the yen has given up ground again," the expert stated.
In his view, 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 serious risks: if the regulator leaves the rate unchanged, the market will quickly react with disappointment. After such decisions, the yen has already fallen to 160 per dollar. Currently, market participants are counting on central bank steps rather than new currency interventions.
My analysis: the sharp jump in probability on Polymarket reflects a fundamental shift in how the market perceives the Bank of Japan's readiness to act. However, the 84% bet looks overstated — the regulator may prefer to pause to assess the effect of previous measures. Attentive traders should account for the high risk of yen volatility ahead of the September meeting.