The Japanese Yen weakens as traders pare Bank of Japan October hike bets

The Japanese Yen is weakening due to traders reducing expectations of a Bank of Japan (BoJ) rate hike in October. The BoJ published its September meeting summary at 23:50 GMT on Wednesday, leading investors to cut their bets on an October rate increase. Currently, the USD/JPY exchange rate is trading just above 158.00 and is heading for its third consecutive weekly gain.

The BoJ raised its rate to 1.25% on September 18 by a 7-2 vote, stating it would continue raising if its outlook remains the same. Analysts now anticipate the next hike in December, rather than October, based on the BoJ's typical three-month frequency of rate adjustments. If the BoJ delays the hike further, the next change in the US-Japan interest rate differential can only come from the Federal Reserve on October 28, with a near one in three chance of a hike according to futures.

Thursday's last leg higher in USD/JPY was triggered by news of a third US aircraft carrier group being deployed to the Middle East, causing investors to favor the US Dollar over the Yen as a safe-haven currency. Tokyo's core inflation rate for September, excluding fresh food, is set for release at 23:30 GMT on Thursday, with a forecast of 2.4% compared to 1.8%.

Japanese wage figures for August, last at 4.7% year-over-year, will be released on Tuesday at 23:30 GMT. A strong Tokyo number could reignite the bullish trend, but the BoJ's September meeting summary was sufficient to remove half of the upward momentum. Resistance levels are currently at 158.50 and 159.00, while support is found at 158.00, the 50-day Exponential Moving Average (EMA), where the last leg higher stopped.

Bias is currently long, with 157.50 as the next objective and 158.50 as the second. The daily Stochastic Relative Strength Index (Stoch RSI) is near 82 and still rising, indicating the move is stretched as it approaches the Tokyo data release. A daily close below 157.00 would end the current trend. The Japanese Yen is one of the world's most traded currencies, heavily influenced by the performance of the Japanese economy and the Bank of Japan's policy decisions.

The BoJ's mandate includes currency control, and occasional interventions have been used to lower the Yen's value, although this is rare due to concerns about political implications with trading partners. The BoJ's ultra-loose monetary policy from 2013 to 2024 led to the Yen's depreciation against major currencies due to increasing policy divergence between the Bank of Japan and other central banks, particularly the US Federal Reserve.

Recently, as the BoJ gradually withdraws from ultra-loose policy and interest rates are cut in other major central banks, the divergent policy stance is narrowing the US-Japan bond yield differential. Historically, the Yen has been seen as a safe-haven investment, strengthening during times of market stress due to its perceived reliability and stability.