Japanese Yen: September BoJ decision shapes path – HSBC

HSBC highlights that markets now expect the Bank of Japan (BoJ) to tighten policy more quickly, with overnight index swaps implying about 75bp of cumulative hikes by April 2027 and assigning odds to a move at the 18 September meeting. The bank’s base case is for USD/JPY to remain range-bound, but it also outlines a risk scenario of a downtrend if BoJ shifts more aggressively.

BoJ path and USD/JPY scenarios

"Markets now expect the Bank of Japan (BoJ) to tighten policy faster than it has done in recent years. Overnight index swaps imply around 75bp of cumulative hikes by April 2027 and even assign meaningful odds of a hike at the 18 September meeting, which stands out as unusual. These moves suggest investors anticipate a change in how the BoJ responds to inflation and growth risks."

"Recent catalysts for such hawkish expectations in the market stem from US Treasury Secretary Bessent’s comments (the ‘Readout’ of his meeting with BoJ Governor Ueda published on 30 August, and “do the right thing”; Bloomberg, 31 August) as well as BoJ Board Member Takata’s comments that outsized rate hikes (>0.25%) and back-to-back rate hikes are possibilities (Bloomberg, 2 September). The question now is whether there are only small changes that stabilise USD/JPY in its recent range (our base case), or if there are big changes that can trigger a downtrend in USD/JPY (our “risk” scenario)."

"Overall, we believe investors may need clearer evidence of a policy shift – making the 18 September BoJ decision a critical test. We also remain cautious about broader structural concerns, especially around US fiscal sustainability, which could still return and weigh on the dollar yet again."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)