The market is pricing in an 84% probability of a rate hike by the Bank of Japan in September.
Data from the decentralized forecasting platform Polymarket shows a dramatic shift in market participants' expectations regarding Japan's monetary policy. In just two weeks, the probability of a key interest rate hike by the Bank of Japan at the September meeting has surged from 22% to an impressive 84%. This signals that investors are increasingly confident in the regulator's readiness to tighten lending conditions.
Failed interventions and pressure on the yen
The reason for such a sharp revision of expectations was the obvious ineffectiveness of currency interventions by Japanese authorities. Despite significant injections to support the national currency, the yen failed to hold its gained positions. This week, the USD/JPY exchange rate fell by about 1%, reaching 159.43 yen per dollar. This is the worst weekly result since May of this year. In essence, the Japanese currency has already lost about half of the growth achieved after coordinated interventions in late July and early August, when the rate retreated from the level of 164 yen per dollar.
Similar dynamics were observed earlier: after the April intervention, the yen slid back to its 40-year lows in the following months. This confirms that one-off measures without changes in fundamental monetary policy cannot reverse the long-term weakening trend.
Betting on the central bank's resolve
The market, apparently, has concluded that the only effective tool to support the yen is a real rate hike. Traders expect that the Bank of Japan may be forced to take this step as early as next month, signaling a more aggressive normalization of monetary policy. Inflationary pressure in the country is gradually approaching the target level, which creates formal preconditions for such a decision.
If the regulator shows hesitation and leaves the rate unchanged, the market could react extremely painfully. Participants no longer believe in the effectiveness of new interventions and are betting solely on the central bank's actions. The risk of disappointment and a subsequent collapse of the yen to new lows around 160 per dollar becomes extremely high.
My view: The market, as usual, tends to extremes. The sharp jump in probability from 22% to 84% reflects not so much the emergence of new information as a panicked reassessment of the situation after the failure of interventions. However, in this case, the market may be right: the Bank of Japan has indeed found itself in a corner where delaying a rate hike risks a complete loss of confidence in the yen. The September meeting will be the moment of truth.