BOJ faces higher bar to support yen after Fed’s hawkish hike

The Bank of Japan (BOJ) faces an increased challenge in supporting the yen following the Federal Reserve's hawkish interest rate hike on Wednesday. Strategists warn that the currency could continue to weaken unless the BOJ conveys that further tightening is imminent during its meeting on Friday (Sep 18). The Fed raised borrowing costs for the first time since 2023 and signaled additional hikes this year.

The yen fell as much as 1% to 156.42 per dollar in response to the Fed's move. Analysts note that Japan is under significant pressure to hike rates and convey a hawkish message to mitigate potential damage to the currency. A 25-basis-point (bp) rate increase at the BOJ meeting is nearly fully priced in, with traders focusing on Governor Kazuo Ueda's post-decision press conference for clues on the pace and scope of further tightening.

If the BOJ fails to meet expectations, the 160 level could become a significant risk to watch. The yen's decline also highlights the need for the BOJ to emphasize upside risks to inflation, as higher oil prices could provide additional justification for tighter policy. While the currency may recover to around 159 in the short term, a longer-term shift suggests the pair reached a major top this summer, with Citi strategists predicting dollar-yen could eventually fall back towards 160.