Market Outlook: Bank of Japan's Rate Hike in September May Struggle to Curb Yen Weakness, Expectation of Consecutive Hikes Is Key

1. The market broadly expects that the Bank of Japan will most likely raise interest rates ahead of schedule at the September policy meeting, and that the Japanese government will not step in to block the move at that time. However, the current USD/JPY exchange rate remains firmly above the 159 level, indicating that a single 25-basis-point rate hike will not fundamentally reverse the trend of the market favoring the US dollar and shorting the yen.2. Traders will only turn bullish on the yen if they are convinced that the Bank of Japan will raise rates twice in succession. However, before making any policy adjustments, the Bank of Japan needs considerable time to guide market expectations, and establishing a consensus around consecutive rate hikes faces significant challenges. Although interest rate futures show an extremely high probability of a September rate hike, the market still maintains large net short positions on the yen, reflecting a cautious attitude towards the yen’s outlook.3. Even if the USD/JPY temporarily drops after the Bank of Japan's decision, once the market refocuses on Japan's deeply negative real interest rates and the persistent appeal of carry trades, the USD/JPY exchange rate could return to an upward channel. Although Japan has intervened on a large scale this month, the 155 level was still not effectively breached. As long as USD/JPY fails to forcefully break below this key support, speculative funds shorting the yen will not unwind large positions and exit the market.