The market is pricing in an 84% probability of a rate hike by the Bank of Japan in September.
Participants on the decentralized prediction platform Polymarket have dramatically revised their expectations regarding the Bank of Japan's monetary policy. In just two weeks, the probability of a key rate hike in September has surged from 22% to 84%.
This shift in sentiment occurred after the currency intervention by Japanese authorities ceased to provide support for the yen. The national currency has given back a significant portion of its recent gains and is posting its worst weekly performance in three months.
The Intervention Effect Is Fading
This week, the yen has declined by approximately 1%, reaching 159.43 against the dollar. This is the worst weekly result since May. The currency has already retraced about half of the appreciation that followed the joint intervention by the Bank of Japan in late July and early August, when the exchange rate was held around 164 yen per dollar.
A similar pattern was observed earlier: after the April intervention, the yen slid back to a 40-year low in the following months. This confirms that one-off measures without a change in fundamental policy are unable to alter the trend.
Notably, Tokyo's former top currency diplomat Mitsuhiro Furusawa recently stated in an interview that authorities could tap currency reserves again at any moment. According to him, officials are also prepared to signal to the market a faster pace of rate hikes to support the currency.
The Market Is Betting on a Hike
The link between interventions and decisions on the key rate explains the shift in expectations. Traders on Polymarket now estimate the probability of a quarter-point rate hike at more than 80%.
OCBC strategist Sim Moh Siong believes that interventions alone will not reverse 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 risks: if the regulator leaves the rate unchanged, the market will quickly react with disappointment. After similar 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 not so much insider information as a growing understanding that Japan has exhausted its arsenal of "cheap" tools to support the currency. Interventions without a rate hike are merely a temporary painkiller. If the Bank of Japan meets expectations in September, we could see the yen strengthen, which would put pressure on carry trades and, consequently, on risk assets, including cryptocurrencies. Investors should prepare for heightened volatility across all markets.