Bank of Japan hike bets firm as the yen reaches a six-month high

Markets are pricing a 75% chance the Bank of Japan raises rates by a quarter point at its meeting on September 18, with a 60% probability attached to a further step^1,2,3. An adviser to Prime Minister Takaichi, described as a reflationist, projected that the central bank is likely to raise rates in September and keep hiking once every quarter until January next year^4,5.

The currency has responded. The yen climbed to a six-month high as rate outlooks shifted, rising to its strongest intraday level since late February and extending a recovery that gathered momentum last week⁷. A sharp surge in the yen, sparked by a Bank of Japan board member who raised the prospect of a larger or back-to-back move, was described as exposing market fragility⁸. The currency is underpinned by hawkish repricing of BoJ expectations set against Federal Reserve bets⁹.

Washington’s hand in it

US Treasury Secretary Scott Bessent has called on Japan to raise interest rates, invoking a Spike Lee film title to make the point, in remarks framed as signalling the end of Abenomics⁶. Japan appears to have paid for its own currency defence by selling reserves: it likely sold a portion of its holdings of foreign securities to fund a record yen intervention^11,12. Bessent has separately announced that the US government would double the size of its buybacks of longer-dated debt for two months¹².

Domestic bond markets are repricing alongside. Japan’s 30-year bond yield broke above 4.18%, and analysts warn the Japanese repricing could influence global capital flows and reduce the appeal of carry trades¹³. Speculation has also grown that Japan’s Government Pension Investment Fund may raise a target allocation¹⁰.

Why it matters to investors

Japan is the last major economy exiting near-zero rates, so the transmission runs outward rather than inward. A quarterly hiking path⁴ combined with long-end yields above 4.18%¹³ changes the arithmetic of borrowing in yen to buy assets elsewhere¹³.

Two of the mechanics are already visible. Intervention funded by selling foreign securities links the yen directly to Treasury supply¹¹, and that lands in the same week as an enlarged US buyback programme¹². Asian equities were set to rise on the strong US jobs data with the yen in focus¹⁰, while the dollar got little lift from stronger Fed hike expectations¹.