Commerzbank’s Volkmar Baur notes that Japanese government support for an imminent Bank of Japan rate hike has reinforced market expectations rather than surprised them. Probabilities now favor a hike as early as September, with October fully priced and another move in December possible. These evolving rate expectations, alongside intervention risks, are helping to stabilize the Japanese Yen.

BoJ hike odds and JPY stability

“Yesterday morning, shortly after we sent out our Daily Currency Briefing, a news ticker reported that the Japanese government had reportedly expressed its support for an imminent interest rate hike by the Bank of Japan. On the one hand, this is significant.”

“While the Bank of Japan is nominally independent, it is obligated to coordinate closely with the government to fulfill its price stability mandate. On the other hand, this merely confirmed what the market had already been increasingly pricing in over the past few days. Consequently, it was not surprising that the JPY did not appreciate more significantly in response to this news.”

“Since the recent intervention by the Japanese Ministry of Finance and the Bank of Japan’s last meeting, things have started to shift somewhat.”

“So it seems that it is not just the fear of further intervention that is currently preventing the market from weakening the JPY more significantly. Expectations are also slowly adjusting and stabilizing the currency.”

“After the market had long assumed that the key interest rate would remain unchanged in September and would likely not be raised until December, there is now seen to be about a 75% chance that a rate hike could come as early as September. A rate hike in October was already fully priced in as of yesterday, and for December, there is now even the possibility of another rate hike.”