BOJ faces higher bar to support yen after Fed’s hawkish hike
Observers expect a 25 bp increase at Japan central bank’s meeting this week, and will be looking for clues about further tightening
Published Thu, Sep 17, 2026 · 05:27 PM
[TOKYO] The yen’s sharp drop after the US Federal Reserve’s hawkish hike is raising the stakes for the Bank of Japan’s (BOJ) policy meeting on Friday (Sep 18), with strategists warning that the currency could weaken further unless officials convince markets that more tightening is coming.
The Fed lifted borrowing costs on Wednesday for the first time since 2023 and projected further increases, prompting traders to price three additional hikes by the middle of next year. That threatens to keep the US-Japan rate gap wide, even as the BOJ is expected to raise its own policy rate this week.
The yen weakened as much as 1 per cent overnight to 156.42 per dollar in the wake of the Fed move.
The reversal comes after a sharp rally earlier this month, fuelled by expectations of faster BOJ tightening, an unwind of yen-funded carry trades and speculation that Japanese pension funds could shift more money to domestic assets. It edged 0.2 per cent higher to 155.96 per greenback in Thursday afternoon trading.
“Japan is certainly facing an enormous amount of pressure to both hike and deliver a hawkish message to minimise the damage,” said Glenn Yin, director of research at ACCM in Melbourne. If the BOJ disappoints, “the 160 level, in short order, is not a risk you can write off”.
The bar is high. A 25-basis-point (bp) increase is almost fully priced by overnight index swaps, leaving traders focused on BOJ governor Kazuo Ueda’s post-decision press conference for clues on the pace and scope of further tightening. Hawkish board member Hajime Takata has even kept the door open for an outsized interest-rate increase or back-to-back hikes.
The yen’s renewed decline gives the BOJ greater reason to emphasise upside risks to inflation, according to Rinto Maruyama, senior rates and FX strategist at SMBC Nikko Securities. Higher oil prices could provide policymakers with further justification for tighter policy, he added.
Friday’s expected increase would take Japan’s policy rate into estimates of the neutral range, making it unlikely that officials will signal either a 50 bp move or a sequence of back-to-back hikes, according to Maruyama. He sees 158 as the next upside target for dollar-yen if the meeting is interpreted as dovish.
That leaves the currency vulnerable if investors conclude that the BOJ’s tightening cycle will struggle to keep pace with the Fed’s. Over time, Maruyama sees scope for dollar-yen to grind back towards 160 if US rates rise faster than those in Japan.
The latest slide also puts intervention risk back in focus after Japan and the US carried out their first coordinated yen-buying operation since 1998 this summer. Officials have emphasised the speed and disorderliness of currency moves rather than any specific level, but another push towards 160 could test their tolerance.
Japan spent a record 15.4 trillion yen (US$98.6 billion) on intervention in the month to Aug 26, according to data from the finance ministry. US Treasury Secretary Scott Bessent has since continued to signal support for a stronger yen, potentially adding to traders’ reluctance to rebuild bearish positions.
Dollar-yen could recover to as high as 159 in the short term, but over the longer term “it should become increasingly clear the pair reached a major top this summer”, noted Citigroup strategists. Repeated yen-buying intervention and increasingly attractive Japanese government bond valuations are beginning to drive a regime shift, they added.
There are other reasons to expect any renewed yen selling to be less aggressive than before. Carry traders were burned by the currency’s recent rally, while hedge funds have already pared bearish positions. Leveraged traders halved their wagers against the yen in the week to Sep 8, according to Commodity Futures Trading Commission data.
Still, a rate hike on Friday may not be enough to support the currency, as the central bank “may not adopt a stance as hawkish as the Fed’s, which could serve as an immediate catalyst for yen weakness”, said Akira Moroga, chief market strategist at Aozora Bank. He sees 158.50 per dollar, around the 200-day moving average, as the next key threshold. BLOOMBERG
