Citi Research expects the Bank of Japan to raise its policy rate to 1.25% at its upcoming meeting, but says the voting split among board members and the Federal Reserve's decision next week will decide the yen's near-term direction. The yen has already surged to its strongest level since February, with USD/JPY trading around 154.29.
The yen jumped to its strongest level since February this week, a move Reuters described as repositioning ahead of a Bank of Japan meeting. Citi Research expects the meeting will raise the policy rate to 1.25%. USD/JPY last traded at 154.29, down 0.05% on the day.
Board votes matter more than the hike itself
A hike this month is largely priced in, but Citi says investors are watching the Policy Board members aligned with Prime Minister Sanae Takaichi's reflationary agenda. Board member Toichiro Asada, who voted against a hike in June, and fellow Takaichi appointee Ayano Sato face intense scrutiny over how they vote this time.
Dissenting votes from both would reinforce perceptions of political pressure on the BOJ to keep borrowing costs low, potentially lifting the dollar back toward the 155 yen mark. A unanimous vote to hike, however, could signal Takaichi bowing to pressure from U.S. Treasury Secretary Scott Bessent, who has pushed for normalizing Japanese monetary policy following joint currency interventions between Washington and Tokyo.
The Fed's decision looms just as large
Citi says near-term currency moves depend heavily on the Fed's decision next week too. Continued downward momentum could push the dollar toward 152 yen, while a surprise Fed hike would make it hard for the dollar to stay below 155 yen, provided U.S. equities hold up. Even if the Fed holds rates steady, a positive stock market reaction could limit the yen's gains and keep USD/JPY supported above the 150 level.
Data strengthens the case for tightening
The case for a BOJ move was bolstered Tuesday after an upgrade to Japan's second-quarter GDP estimates and the biggest yearly rise in real wages in five years in July, Reuters reported. There has even been speculation of a bigger increase than the normal 25 basis points, though that view remains unconventional. Tokyo's Nikkei 225 fell almost 2% on Tuesday as the yen strengthened.
Markets will also parse the BOJ's Summary of Opinions, due October 1, for signs of continued government resistance to tightening — at the June meeting, Cabinet Office representative Minoru Kiuchi opposed raising rates to 1%. Longer term, Citi projects that narrowing interest rate differentials between the U.S. and Japan will spur a broader unwinding of yen carry trades, setting a clearer downward trend for the dollar against the yen.
Sources: Investing.com, Reuters
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