"Japan plus the United States cut", central bank's lower-than-expected outlook drives the yen to a new high for the year

As market expectations for the Bank of Japan to raise interest rates again strengthen, coupled with expectations for the Federal Reserve to cut interest rates next Thursday, the yen to dollar exchange rate has "peaked" to its highest level this year.

Strong Atmosphere for Japanese Rate Hike

The latest data shows that traders have increased their bets on a 50 basis point rate cut by the Federal Reserve next week, raising the rate cut expectations to 50%. Previously, some traders expected the Federal Reserve to cut rates by over 100 basis points this year. Meanwhile, Bank of Japan officials have hinted at a "hawkish" stance this week: "The Bank of Japan will further raise interest rates."

Bank of Japan's Naoki Tamura stated on Thursday that "the Bank of Japan should accelerate the pace of rate hikes, with interest rates expected to reach 1% as early as October 2025." He also mentioned that as the possibility of Japan's economy sustainably achieving the 2% inflation target increases, the conditions for further rate hikes by the Bank of Japan are gradually maturing.

In the past few days, Bank of Japan Governor Haruhiko Kuroda reiterated in a document that "if economic and price data meet expectations, the central bank will continue to raise interest rates."

Although most analysts expect the Bank of Japan to keep rates unchanged at next week's meeting, comments from BOJ officials indicate that the possibility of a rate hike later this year still exists.

Strong Return of the Yen

On Friday, the yen rose for the fourth consecutive day, with an increase of up to 1.1%, reaching 140.29 against the dollar at one point, hitting a new 9-month high.

Currently, the yen is trading at 140.80 against the dollar, with a slightly narrowed increase.

Against the backdrop of narrowing interest rate differentials, the yen has rebounded since hitting multi-decade lows in mid-year, rising over 14% from the end of June to date.

Data from the Commodity Futures Trading Commission (CFTC) shows that as of September 10, asset management companies' bullish sentiment towards the yen has risen to the highest level since March 2021.

At the same time, some hedge funds are increasing their bullish bets on the yen in the options market, expecting the yen to continue its upward trend this quarter.

Brad Bechtel, Global Head of FX at Jefferies Financial Group, stated that "if the Federal Reserve cuts rates by 50 basis points next week, the yen to dollar exchange rate will break through 140." This would reach the strongest level in over a year.

Takafumi Onodera, Head of Sales and Trading at Mitsubishi UFJ Trust and Banking in New York, also believes:

"Due to the volatility brought by next week's Federal Reserve and Bank of Japan meetings, the yen may break through the 140 mark next week, and there is currently no sufficient reason to sell the yen."

Goldman Sachs' Basic Forecast: Rate Hike in January Next Year

However, as the gloom over the Japanese stock market gradually dissipates, the yen has been rebounding since August. Goldman Sachs believes that the inflationary risks brought by yen depreciation have subsided. In their view, there is no reason for the Bank of Japan to rush to raise rates again, and their basic forecast is for the Bank of Japan to raise rates in January next year However, due to the unpredictable nature of the financial markets, Goldman Sachs believes that the timing of the next rate hike by the Bank of Japan remains uncertain:

"The timing of the next rate hike by the Bank of Japan remains highly uncertain. If the financial markets experience a significant decline due to concerns about a recession in the U.S. economy and other factors, economic activity and inflation trends in Japan may be lower than expected, leading to a possible delay in rate hikes.

If economic, wage, and price data continue to show resilience, and the financial markets remain relatively stable, a rate hike in December is possible."

As for the upcoming monetary policy meeting next week, Goldman Sachs expects the Bank of Japan to maintain the policy rate at 0.25%