Following the coordinated intervention by the Japanese and U.S. governments, expectations that rate hikes priced into the yen interest-rate market will come sooner than previously expected have gained ground. Nomura Securities' Shishido Tomoaki (宍戸知暁) explains the outlook after the coordinated intervention and the likely developments ahead.
The Japanese and U.S. governments jointly intervened to buy yen on 31 July 2026, strengthening views in the market that the Bank of Japan will raise rates faster than previously expected. The OIS market priced in a 25bp rate hike by October 2026 and cumulative 50bp of hikes by March 2027. Nomura Securities also revised its forecast to show the Bank of Japan raising rates in October of the same year, March 2027 and July of the same year, once every 3 meetings. This assumes a pace of one rate hike every 3 meetings.
However, the view remains that the pace is still slow compared with other countries. Although major inflation indicators are approaching 2% and the Bank of Japan has indicated that underlying inflation is likely to reach nearly 2%, some analysts say the Galápagos phenomenon will continue. This suggests that faster rate hikes could help ease downward pressure on the yen.
The next focus will be determining the interval between rate hikes and the level ultimately reached. If hikes accelerate to once every 2 meetings, they could limit the decline in real interest rates and relatively restrain downward pressure on the yen. There is also a view that this could help contain downward pressure on the yen even if expectations for the terminal rate do not rise significantly.
Attention is also focused on developments under the Takaichi administration, with the key issue expected to be whether it issues a message accepting a rate hike in September. Regarding the Bank of Japan's long-term interest-rate outlook, two-year yields are seen as having room to rise, while 10-year yields may remain within a range around current levels.