Yen Weak Even After BOJ Hikes to 1.25%? 80% of Experts Expect Weakness to Return by Year-End

【Financial News Tokyo = Correspondent Hye-jin Seo】With the Bank of Japan (BOJ) expected to raise its policy rate this week to 1.25% annually, the highest level in 31 years, eight out of 10 foreign-exchange market experts predicted that yen weakness would return by year-end after a short-term period of yen strength. They said the hike has already been priced into exchange rates, while high oil prices and a widening trade deficit could push the yen lower again.
According to Nihon Keizai Shimbun on June 14, all 14 foreign-exchange market experts surveyed expected the BOJ to raise its current policy rate of 1.0% annually to 1.25% at its monetary policy meeting on June 17-18. According to Dotan Research and others, the probability of a September rate hike priced into the interest-rate derivatives market stood at 98% as of the afternoon of June 11.
If the BOJ raises rates, it will be the first hike in three months, following the previous increase in June. It would be the shortest interval during the rate-hike cycle that began in March 2024, while 1.25% would be the highest level since 1995.
A sharp rise in international oil prices and corporate prices accelerated the case for a hike. Amid tensions in the Middle East, West Texas Intermediate crude oil (WTI) futures rose above $100 per barrel on June 10, reaching their highest level in three and a half months.
Japan’s corporate goods price index also rose 7.6% in August from a year earlier. The increase reflected growing concerns that higher costs could spread to consumer prices.
The market’s focus is shifting from whether the BOJ will raise rates to the policy board’s vote and BOJ Governor Kazuo Ueda’s press conference. If Ueda indicates that further hikes will be considered at each meeting, expectations for an increase in October or December could grow, strengthening demand for the yen.
The market is pricing in a probability of more than 80% that the BOJ will raise rates again by December, and about 60% that it will deliver another hike by March 2027. Expectations for the terminal policy rate have also risen to above 2%.
Amid expectations of consecutive rate hikes, the yen-dollar exchange rate fell from around 160.10 yen per dollar on June 1 to around 153.80 yen on June 8, a decline of more than 6 yen. Speculators’ outstanding yen-buying positions also surged 53% from the previous week to 178,791 contracts, the highest level in nine months.
However, analysts also warned that yen-buying positions could be unwound to avoid losses caused by the interest-rate differential if the yen fails to strengthen further.
Kyugo Hasegawa, a market economist at Mizuho Bank, said, "Buying the yen is a short-term bet that results in losses if the yen does not appreciate." He added, "At the BOJ meeting, messages about the pace of future rate hikes have become even more important."
In fact, about 80% of the experts surveyed by The Nikkei expected the year-end yen-dollar exchange rate to be higher than the recent level in the 152-yen range. A higher oil price could widen Japan’s trade deficit, while a stronger yen could lower import prices and reduce the BOJ’s need to rush into additional rate hikes.
Toru Sasaki, chief strategist at Fukuoka Financial Group, forecast that the exchange rate could rise again to 160 yen per dollar if high oil prices coincide with delays in the BOJ’s response. Conversely, some analysts believe the rate could fall to 149 yen by year-end if the BOJ raises rates faster than expected.
The Nikkei noted that the key factor determining the yen’s direction at this meeting will not be the 1.25% hike itself, but the pace of subsequent increases. Analysts said short-term yen strength could end and yen weakness could return unless the BOJ delivers a strong signal of further hikes powerful enough to support the yen-buying positions that have already accumulated.
[email protected] Hye-jin Seo Reporter