The market is pricing in an 84% probability of a rate hike by the Bank of Japan — what is happening with the yen
Participants on the decentralized prediction platform Polymarket estimate the probability of a rate hike by the Bank of Japan in September at 84%. Just two weeks ago, this figure stood at only 22% — a sharp reversal in expectations reflects a shift in sentiment in the currency market.
This dynamic is a direct consequence of the weakening effect of currency interventions by Japanese authorities. The yen, which strengthened from around 164 per dollar after coordinated regulator actions in late July and early August, has now given back a significant portion of its gains. This week, the JPY rate fell by about 1% to 159.43 per dollar, marking the worst weekly performance since May.
Notably, a similar pattern was observed earlier: after the April intervention, the yen slid back to 40-year lows over several months. This confirms that one-off support measures without changes in monetary policy cannot alter the long-term trend.
The intervention effect is weakening
The current situation shows that the market is increasingly distrustful of verbal and targeted interventions. Former top currency diplomat in Tokyo, Mitsuhiro Furusawa, recently noted that authorities are ready to deploy currency reserves at any moment and may also signal a faster rate hike to support the national currency. However, traders, judging by Polymarket quotes, are betting on the second scenario — monetary policy tightening.
OCBC strategist Sim Moh Siong rightly points out that interventions alone will not reverse the yen's dynamics. In his assessment, the currency needs clear support from the Bank of Japan, which is willing to tighten policy. This view aligns with growing expectations of a faster rate hike, especially as inflation approaches the target level.
Risks of the opposite scenario
However, the opposite scenario cannot be ruled out: if the regulator leaves the rate unchanged, the market may react with disappointment. After similar decisions, the yen has already fallen to 160 per dollar. Currently, market participants are pinning their hopes on central bank actions rather than new currency interventions, making the September meeting a key event for the entire Asian currency pair.
My view: the 84% probability seems overstated, given the Bank of Japan's tendency toward cautious actions and potential pressure from the government concerned about the cost of servicing public debt. Nevertheless, if the regulator does proceed with a hike, it would be a powerful signal to the market and could strengthen the yen more than any interventions. Investors should prepare for heightened volatility ahead of the meeting.