According to Bloomberg on Sept. 16 local time, the yen fell as much as 1% overnight to 156.42 per dollar after the Fed announced the rate increase following a two-day Federal Open Market Committee meeting. The move reflected expectations that the U.S.-Japan rate differential — widely cited as the main driver of yen weakness — will widen further.
Markets expect the Bank of Japan to raise its policy rate at its September policy meeting on Sept. 17-18. Overnight index swap (OIS) markets put the probability of a 0.25 percentage point increase from the current 1% at 98.2%. But with Fed Chair Kevin Warsh signaling the possibility of further hikes, saying inflation is "too high and has been too high for too long," investors are expected to focus on whether Bank of Japan Governor Kazuo Ueda hints at consecutive rate increases or a 0.50 percentage point "big step" at his news conference.
"Japan is under enormous pressure to raise rates and deliver a hawkish message to minimize the shock from yen weakness," said Glen Yin, head of research at ACCM. "If it fails to meet market expectations, we cannot rule out the risk of a move toward 160 yen in the near term."
Japan's Nikkei reported that the Bank of Japan's ongoing push to normalize monetary policy is also strengthening the coupling between U.S. and Japanese markets. During the U.S. rate-hike cycle in 2022, the Bank of Japan kept its negative interest rate policy and yield curve control (YCC) in place, suppressing domestic yields. YCC, which capped the trading range for 10-year government bond yields and involved large-scale bond purchases, directly controlled medium- and long-term rates and partly cushioned the shock from U.S. rate moves. But with the policy scrapped in 2024, the effects of U.S. rate policy now pass through fully to Japan's domestic market.
The Bank of England held its benchmark rate at 3.75% at its September Monetary Policy Committee meeting on Sept. 17, the sixth consecutive hold since December of last year. Still, some expect the BOE to begin raising rates in earnest from November, citing a surge in U.K. natural gas and Brent crude futures prices and August consumer price inflation above 3%. Speculation is also emerging that the European Central Bank could raise rates in December.
