As the world's central banks compete to turn hawks, the Bank of Japan may fall behind and the yen will continue to be under pressure

The Zhitong Finance App learned that on Tuesday, the yen came under pressure against the US dollar as traders bet that it would be difficult for Japanese policy makers to keep up with the hawkish pace of global central banks — which the market believes will maintain a large gap between Japanese interest rates and major economies. As of press time, USD/JPY was at 157.45.

The Bank of Japan raised interest rates by 25 basis points as scheduled on Friday, raising the benchmark interest rate to 1.25%, the highest level in 31 years. However, this interest rate hike, which was widely anticipated by the market, failed to boost the yen; on the contrary, the yen weakened. The market believes that Bank of Japan Governor Kazuo Ueda's remarks at the press conference disappointed investors who expected it to make more hawkish remarks.

The yen's decline was limited due to Japan's holiday season and market concerns that the Japanese authorities might interfere with the foreign exchange market. Earlier reports said that the Japanese side checked the exchange rate of the US dollar against the yen last Friday, and such actions are often a sign that the Japanese government is preparing to intervene in the foreign exchange market.

In addition to a rebound following reports of Japan's exchange rate inspection, the yen has been under pressure since the Bank of Japan raised interest rates last Friday. Regarding interest rate hikes of 50 basis points or continuous interest rate hikes, Kazuo Ueda said at a press conference: “This depends on how the price situation evolves. There are all kinds of possibilities, and we shouldn't rule out any options.” “We are at a stage where we need to take a close look at all the data. But that doesn't mean you can move slowly. We will carefully analyze the data and act in a timely manner if necessary.” He added, “As for the future pace of interest rate hikes, we don't have any preconceived ideas, such as once every three months. We will decide at every policy meeting how best to ensure that underlying inflation remains stable at 2%.”

Kazuo Ueda also said, “As we raise interest rates, financial conditions are becoming less relaxed... It is important to avoid excessive tightening of financial conditions or triggering drastic adjustments in asset prices due to excessive interest rate hikes.”

In addition to Ueda Kazuo's remarks that aren't hawkish enough, two members of the Bank of Japan's monetary policy committee voted against interest rate hikes last Friday, raising concerns that the central bank is “not hawkish enough.” According to reports, among the nine policy committee members, Asada Unichiro and Sato Ayano voted against it. Asada Unichiro's reason is that the CPI increase excluding fresh food was less than 2%, and “the economic situation is not necessarily strong”; Sato Ayano believes that the economic and price situation has not accelerated significantly, and “it is inappropriate to raise interest rates at this time.”

This is in contrast to the US Federal Reserve, which also raised interest rates last week, and also differs from the position of most other central banks around the world. Following the release of hawkish signals one after another, the market now expects these central banks to raise interest rates further this year.

Current market pricing shows that the probability that the Bank of Japan will raise the benchmark short-term interest rate to 1.5% in October is about 30%. Meanwhile, the market expects the probability that the Federal Reserve will raise interest rates by another 25 basis points in October and raise the federal funds rate target range to 4% to 4.25% is about 55%.

Carlos Casanova, senior Asian economist at UBS Private Bank, said in a report to clients: “Unless the Bank of Japan tightens its policy faster than the Federal Reserve, the interest rate spread of about 275 basis points between the US and Japan will continue to support arbitrage transactions funded in yen.” “We expect USD/JPY to rise to 160 by the end of the year and then decline moderately to reach 156 by mid-2027.”

In addition to the yen, the New Zealand dollar is also expected to come under pressure. Since the New Zealand interest rate is only 2.75%, which is significantly lower than other major economies, the New Zealand dollar has been hovering near a multi-month low, and the New Zealand dollar is at 0.5708 against the US dollar. Additionally, RBA Chairman Michele Bullock is expected to release hawkish signals during a fireside conversation later Tuesday. The market currently expects the probability that the Bank of Australia will raise interest rates next week to reach 90%. This will be the country's fourth rate hike this year.

ANZ analysts said in a report: “The price trend of the NZD looks weak as high-yield currencies benefit from more attractive arbitrage returns.” “Even if the market expects the Bank of New Zealand to raise interest rates about 5 times, this is not enough to bring the official cash rate (OCR) close to the US federal funds rate or the Reserve Bank of Australia cash interest rate, and the market expects both to continue to rise.”