The Bank of Japan raised its policy rate to 1.25%, the highest level in 31 years, on September 18, yet USD/JPY kept climbing rather than falling. Verbal warnings from Tokyo have slowed the pair's advance without any actual intervention, while banks and models disagree sharply on where it goes next.
The Bank of Japan raised its policy rate from 1.00% to 1.25% on September 18, the highest level in 31 years. USD/JPY kept rising anyway, because the hike had already been priced in while traders focused on the BOJ's next move.
The interest-rate gap between the US and Japan remains huge, at 4.00% versus 1.15% in favour of the dollar. That gap keeps carry trade flows intact, as traders keep borrowing cheaply in yen to buy higher-yielding dollar assets, and Japan's fiscal stimulus works against the BOJ's tighter policy.
Verbal warnings do more than real intervention
Japan has already tried direct intervention to reverse the trend. In late April, when USD/JPY moved above 160, the yen strengthened by about 3% after intervention. In late July, a joint Japan-US intervention produced a move of around 5%, though the effect faded each time.
As a result, the psychological brake is becoming increasingly important. In late January, a simple rate check with major banks was enough to strengthen the yen by almost 4%. On September 24, Finance Minister Satsuki Katayama said the principles behind the July joint intervention remained in force. On September 25, the yen posted its best daily performance in almost three weeks without any actual intervention, after a hint from US President Trump about possible joint action pushed speculators to close short yen positions.
Banks split on where USD/JPY heads next
Fundamentals still favor the dollar, but the closer the pair gets to 160, the greater the risk of real intervention. Banks disagree on the outcome: MUFG sees USD/JPY near 156 by the end of 2026. ING allows for the pair to remain around 160. JPMorgan, however, sees a scenario where USD/JPY could fall to 142-146 if the global carry trade starts unwinding.
A separate mathematical model puts the probability of USD/JPY touching 160 by year-end at 86-92%. For 165, the probability is estimated at 37-50%. A fall to 150 is estimated at 19-25%, rising to 50% if intervention occurs. A move to 145.00 is put at only 4-7%.
The main question is not whether the BOJ raises rates again, but whether it can convince the market it is ready to act faster and on a larger scale than investors expect.
Source: MQL5
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