Upside potential for USD/JPY above 160 is considered limited, and the course of yen-buying intervention could influence the outlook for an October rate hike.
Following the September US FOMC meeting, the US dollar continued to strengthen, and USD/JPY temporarily attempted to recover into the 159 range. The rate, which was in the 163 range at the end of July, fell below 153 on 8 September, resulting in a sharp shift toward a stronger yen and weaker US dollar, but subsequently recovered more than half of the yen's appreciation. Against this backdrop, renewed yen depreciation pressure has prompted Japanese and US authorities to remain mindful of the possibility of intervention. The market also underwent an adjustment to below 157 again last Friday, and volatility remains high.
The market's focus has shifted to rate-hike trends among major central banks, including a US rate hike in October. Specifically, the market is pricing in the possibility of consecutive rate hikes at the October meetings, and views are spreading that the probability of an October rate hike by the FRB is around 60% and that of consecutive rate hikes by the ECB is around 40%. Meanwhile, expectations for consecutive rate hikes by the Bank of Japan remain relatively low, leaving continued uncertainty over the yen's outlook.
On the fundamentals, attention is focused on the Bank of Japan's decision to raise rates by 25bp at its September meeting and shorten the interval between rate hikes to 3 months. As concerns over inflation rise, partly due to higher crude oil prices, some expect the Bank of Japan to accelerate its rate-hike pace depending on price trends. An improvement in the September Tankan survey's assessment of business conditions among Tokyo retailers and manufacturers, along with faster growth in September's Tokyo core CPI, could support debate over the sustainability of the policy effects.
The risk of renewed yen-buying intervention remains high, and the Japanese authorities may position intervention as a factor that strengthens expectations for an October rate hike. Talks between Japanese and US leaders and finance ministers, as well as comments by officials, may at times signal the possibility of intervention to the market. The October Outlook for Economic Activity and Prices may include an upward revision to the inflation outlook, and attention is focused on whether intervention will be carried out to restrain USD/JPY upside.