"Any Other Approach Could Put Significant Pressure on the Yen": Commerzbank Explains Why the Bank of Japan Should Raise Rates

USD/JPY is currently at 159.66721, having traded narrowly around 159.35 earlier. Commerzbank's latest view notes that if the Bank of Japan continues to hold steady, the market will maintain its positioning of Japan as a low-rate funding currency, and yen depreciation pressure will only continue to accumulate.

**Lack of Rate Hikes to Cement Carry Trade Logic**

Commerzbank analysis suggests that as long as the yen does not show significant appreciation, carry trades using the yen as a funding currency remain "comfortable." If the BOJ does not raise rates, the market will continue to view Japan as a low-rate country, making it difficult to reverse the yen's role as a funding currency, with depreciation pressure only set to increase. This assessment aligns with the core market concern over the BOJ's current policy path: currency intervention without monetary policy coordination is unlikely to provide sustained support.

**Accelerating Inflation Strengthens Case for Policy Response**

Accelerating Tokyo inflation data reinforces the argument that the BOJ needs to respond to price pressures with rate hikes. Data shows the BOJ raised rates to 1% in June, a 31-year high, but relative to the Fed's 3.5% to 3.75% rate range, the rate differential remains substantial. As long as Japanese rates stay far below U.S. levels, the fundamental backdrop of yen weakness will be difficult to change.

**Intervention Effects Fading, Policy Pressure Rising**

Following the earlier joint U.S.-Japan intervention, the yen rebounded from around 164, a four-decade low, to near 155, but has since fallen back below the 160 level. Van Luu, head of global solutions strategy at Russell Investments, noted that intervention effects are fading, and "more measures are needed" to form sustained support. Ayako Fujita, chief Japan economist at JPMorgan, believes that even if the BOJ accelerates rate hikes, short-term rate differentials will remain sufficiently wide, limiting the likelihood of large-scale, rapid unwinding of carry trades. Market focus is increasingly centering on signals for a rate hike at the BOJ's next policy meeting.