JPY Gains Need a More Hawkish Bank of Japan, Analyst Says

According to Sina Finance, the yen's recent rally is becoming harder to sustain because markets have already priced in a Bank of Japan rate hike this week, while the Federal Reserve's tightening cycle still slightly leads the Bank of Japan before year-end. The article said further yen strength would require a more hawkish policy path from the Bank of Japan, making consecutive rate hikes possible, or U.S. rate advantages to be smaller than investors currently expect. It added that the implied policy gap is challenging the yen's advance, even as the currency has risen to its highest level since February and the one-year forward OIS spread between the dollar and the yen has rebounded to around 2.5%. This week's policy meetings will test whether that divergence can continue. OIS markets show about an 85% chance of a 25-basis-point Fed hike on September 16 and a high probability of 50 basis points of cumulative Fed tightening before year-end. Markets have almost fully priced in a Bank of Japan hike on September 18, but assign only a 25% chance of another hike in October, even though they expect nearly 50 basis points of cumulative Bank of Japan tightening by year-end.