The yen's rally is becoming difficult to maintain because the market has included the Bank of Japan's interest rate hike this week in pricing, and the Federal Reserve's austerity cycle is still slightly ahead of the Bank of Japan until the end of the year. Further strengthening requires the Bank of Japan to adopt a more hawkish policy path to make continuous interest rate hikes possible, or the advantage of US interest rates is less than what investors currently expect. Implicit policy differences are currently challenging the yen's rise. Although the yen rose to its highest level since February, the one-year forward OIS spread between the US dollar and yen has rebounded to around 2.5% after a year. This week's policy meeting will test whether this division can continue. According to the OIS market, the probability that the Federal Reserve will raise interest rates by 25 basis points on September 16 is about 85%, and the probability of increasing interest rates by 50 basis points before the end of the year is also high. The market has almost fully taken into account that the Bank of Japan will raise interest rates on September 18, but it only gives a 25% chance of raising interest rates again in October, even though the market expects the Bank of Japan to raise interest rates by a cumulative total of nearly 50 basis points by the end of the year. As a result, the market expects the Fed's tightening intensity to be slightly higher than that of the Bank of Japan until the end of the year, but far from being determined, the Bank of Japan will continue to raise interest rates. The current level of the yen exchange rate seems to be more likely to anticipate that the Bank of Japan's policy normalization path will become more aggressive. This is stronger than the current pricing in the rate market. Maintaining recent gains requires not only interest rate hikes this week, but also sufficient hawkish policy guidance to make continuous interest rate hikes possible and narrow the anticipated policy gap between the US and Japan. Otherwise, the widening policy gap will expose the yen to downside risks.

The yen's rally is becoming difficult to maintain because the market has included the Bank of Japan's interest rate hike this week in pricing, and the Federal Reserve's austerity cycle is still slightly ahead of the Bank of Japan until the end of the year. Further strengthening requires the Bank of Japan to adopt a more hawkish policy path to make continuous interest rate hikes possible, or the advantage of US interest rates is less than what investors currently expect. Implicit policy differences are currently challenging the yen's rise. Although the yen rose to its highest level since February, the one-year forward OIS spread between the US dollar and yen has rebounded to around 2.5% after a year. This week's policy meeting will test whether this division can continue. According to the OIS market, the probability that the Federal Reserve will raise interest rates by 25 basis points on September 16 is about 85%, and the probability of increasing interest rates by 50 basis points before the end of the year is also high. The market has almost fully taken into account that the Bank of Japan will raise interest rates on September 18, but it only gives a 25% chance of raising interest rates again in October, even though the market expects the Bank of Japan to raise interest rates by a cumulative total of nearly 50 basis points by the end of the year. As a result, the market expects the Fed's tightening intensity to be slightly higher than that of the Bank of Japan until the end of the year, but far from being determined, the Bank of Japan will continue to raise interest rates. The current level of the yen exchange rate seems to be more likely to anticipate that the Bank of Japan's policy normalization path will become more aggressive. This is stronger than the current pricing in the rate market. Maintaining recent gains requires not only interest rate hikes this week, but also sufficient hawkish policy guidance to make continuous interest rate hikes possible and narrow the anticipated policy gap between the US and Japan. Otherwise, the widening policy gap will expose the yen to downside risks.