Yen Holds Range Against Dollar as Markets Digest BOJ Hike Expectations – Scotiabank

The yen has been trading in a range against the dollar recently, with relatively subdued market activity. Scotiabank strategists Shaun Osborne and Eric Theoret noted that the yen's movement has been calm, continuing a narrow consolidation pattern, as investors gradually price in the possibility of a 25-basis-point rate hike by the Bank of Japan on September 18. This contrasts with the brief but sharp volatility seen earlier when markets reacted to joint U.S.-Japan intervention, suggesting sentiment is shifting from short-term policy action to an assessment of the medium-term monetary policy path.

**Hike Expectations Firming but Rate Differential Pressure Persists**

Market bets on tighter BOJ policy are increasing. According to overnight index swap data, the probability of a September BOJ hike stands near 50%, while the odds of an October move are around 90%. Some institutions are even more aggressive in their views—Goldman Sachs and Citi expect the BOJ to accelerate hikes starting in September, with the policy rate potentially reaching 2% by the end of next year. However, even with rates at 2%, Japan's yields would remain far below the U.S. federal funds rate range, meaning the fundamental logic driving carry trades has not changed. Morgan Stanley chief Japan economist Takeshi Yamaguchi believes the narrowing rate differential alone is still insufficient to trigger large-scale position unwinding.

**Intervention Impact Fading, Focus Shifts to Key Data**

The yen's rebound following the earlier joint U.S.-Japan intervention has already given back nearly half of its gains, showing that currency intervention alone can only buy time, not reverse the underlying trend. Market attention is now turning to upcoming U.S. CPI data, retail sales figures, and the BOJ's September meeting—events that will serve as key arbiters for the yen's direction. If U.S. economic data weakens, it could trigger a rapid repricing toward a more dovish Fed and a more hawkish BOJ, potentially sending the yen sharply higher and forcing a wave of carry trade unwinding that would amplify volatility across global risk assets. That said, several institutions caution that current positioning leverage and concentration are more moderate than in the period leading up to the August 2024 "Black Monday" selloff, and with the Fed likely to cut rates in an orderly fashion, an extreme stampede may not necessarily repeat.

**External Pressure Could Serve as Policy Catalyst**

Political pressure from the United States may also influence the BOJ's policy pace. Reports indicate that U.S. Treasury Secretary Scott Bessent has repeatedly called out the BOJ and looks forward to meeting with Governor Kazuo Ueda. Masato Kanda, a senior market economist at Mizuho Securities, said it is logical to view coordinated intervention and pressure for further BOJ hikes as part of the same playbook, with U.S. officials ultimately aiming to prevent Japanese bond yields from rising and spilling over into the U.S. Treasury market. The U.S. Treasury's semi-annual foreign exchange report released last month also emphasized that monetary policy normalization would help stabilize inflation expectations and reduce excessive currency volatility.