Traders are pricing in an 84% probability of a rate hike by the Bank of Japan.
Data from the decentralized prediction market Polymarket shows a sharp reversal in expectations: the probability of a key interest rate hike by the Bank of Japan at the September meeting is estimated by participants at 84%. Just two weeks ago, this figure stood at 22%.
This shift in sentiment occurred against the backdrop of a weakening effect from currency interventions by Japanese authorities. The yen, which had previously shown steady gains, is now losing ground and heading toward its most significant weekly decline in three months.
The intervention effect is fading
This week, the yen has fallen by approximately 1%, reaching 159.43 per dollar. This is the worst weekly result since May. The currency has effectively given back half of the gains it made following the coordinated currency intervention by the Bank of Japan in late July and early August. Before those measures, the exchange rate was holding around 164 yen per dollar.
Similar dynamics were observed earlier: after the April intervention, the yen returned to its multi-year lows in the following months. This confirms that one-off targeted measures without changes to fundamental monetary policy cannot provide sustainable support for the national currency.
Notably, even Tokyo's former top currency diplomat Mitsuhiro Furusawa notes the authorities' readiness to deploy currency reserves at any moment. However, according to him, officials may also signal to the market a faster rate hike to support the yen. This factor, apparently, has become the key trigger for the revision of traders' expectations.
The market is betting on the central bank's resolve
The connection between interventions and key rate decisions explains the change in sentiment. Polymarket participants now estimate the probability of a quarter-point rate hike at above 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," said Siong.
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 regulator's target level.
The opposite scenario carries risks: if the central bank 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 steps by the central bank rather than new currency interventions.
My comment: The derivatives and prediction platform market often outpaces traditional economist surveys, and the current gap in estimates is a clear confirmation of this. If the Bank of Japan meets expectations, it could become an important signal for global markets, including the cryptocurrency market, where yen strengthening traditionally correlates with increased volatility in carry trades. Watch Japan's inflation data in the coming weeks — it will be the decisive factor.