Yen Weakens as Markets Scale Back BoJ Rate Hike Bets

Key Moments

BoJ Caution Undermines Yen, Focus Turns to Fed Minutes

USD/JPY stayed supported around 158.35 during early Asian trading on Wednesday, as diminishing prospects for an imminent Bank of Japan (BoJ) rate hike pressured the Japanese Yen against the US Dollar. Market participants are now looking to the Federal Open Market Committee (FOMC) Minutes due later on Wednesday for further guidance on US monetary policy.

BoJ Governor Kazuo Ueda stated on Tuesday that the central bank would “assess the likelihood and risks of the baseline economic and price outlook being realized” when considering the pace and timing of further rate increases. This has reinforced expectations that policymakers will adopt a measured approach at the October monetary policy meeting, limiting support for the Yen.

Separately, Reuters reported on Tuesday that new BoJ policymaker Ayano Sato backs lifting interest rates in multiple stages. Even so, market-derived pricing signals little urgency for the next move.

Market Pricing Shows Lower Near-Term BoJ Hike Odds

Overnight index swaps indicated that investors currently assign about a 12% probability to a BoJ rate hike this month, a notable decline from levels as high as 40% early last week, according to Bloomberg. When the December meeting is factored in, the implied likelihood of a hike rises to around 90%.

Soft US Labor Data Eases Fed Hike Expectations

On the US side, weaker labor market figures have led traders to scale back expectations for a Federal Reserve rate increase this month. Data from the US Bureau of Labor Statistics (BLS) on Friday showed that Nonfarm Payrolls (NFP) increased by 29K in September, versus a 133K gain in August and below market forecasts of 90K. The Unemployment Rate edged up to 4.2% in September from 4.1% in August.

Rabobank: Gradual BoJ Path, Elevated USD/JPY, Intervention Fears

Analysts at Rabobank highlighted that, following the “as expected 25 bps rate rise last month,” market pricing now “suggests only a limited prospect of a policy move at the October 30 meeting, with expectations centring on December for the next policy move.” While BoJ Governor Kazuo Ueda reiterated that policymakers intend to “continue raising the policy interest rate” and characterized the Japanese economy as expanding “moderately,” Rabobank believes “this strengthens the market’s expectation that back-to-back rate hikes BoJ are unlikely.” As they further noted, “even so, the Bank is still not widely viewed as being in a position in which back-to-back rate rises are appropriate,” although “this may suggest that a hastened pace of rate hikes is possible, though clearly that depends on how the economy develops in the months ahead.”

Externally, Rabobank’s base case is that “the market has anticipated too much Fed policy tightening next year.” They argue that, “assuming some Fed rate hike risk is priced out, USD/JPY has the potential to move lower into 2027,” but currently “we maintain a 3-month USD/JPY target of 155.00.” Although USD/JPY has climbed since the September policy decision, Rabobank observes that “the market is fearful that a return to levels close to 160, could again trigger further intervention.” In their view, the BoJ’s inflation goal “now appears to have reached the point when it can instead shift its focus to stabilising price pressures around the target level,” bolstering expectations of a gradual, rather than forceful, tightening cycle.

Fed’s Schmid Strikes Hawkish Tone, AI Cited as Inflation Driver

Fed’s Schmid delivered a notably hawkish message, earning an 8/10 score on the FXS Speechtracker, slightly higher than the 7.5/10 historical average and pointing to a firmer-than-usual policy stance. Emphasizing that inflation is “frustrating,” that the Fed “still has a way to go,” and that AI is now “one of the largest drivers of inflation,” the remarks underscored worries about persistent price pressures and new structural forces. The warning that Fed credibility is on the line and that “the Fed still has work to do on the short rate despite higher long-term yields” signaled tolerance for maintaining or even tightening policy in the face of elevated bond yields.

The FXS Fed Sentiment Index increased by 0.34 points to 137.91, indicating that the broader tone of Fed communication remains firmly hawkish and well above the neutral 100 level. This modest rise, in line with the stronger speech score, suggests that Fed messaging continues to underpin a resilient Dollar bias as markets price in a sustained period of restrictive monetary policy.

Technical Picture: USD/JPY Capped by 100-Day SMA Despite Underlying Support

From a technical standpoint, the USD/JPY daily chart shows the pair constrained in the near term, with the 100-day simple moving average (SMA) and the upper Bollinger Band acting as resistance and curbing rebound attempts. Spot prices are holding above the middle Bollinger Band, while the 14-day Relative Strength Index, at 56.27, signals mildly positive momentum that has not yet overcome the broader bearish setup indicated by the dominant longer-term average.

On the upside, initial resistance sits at the 100-day SMA at 159.55, with further resistance near the upper Bollinger Band around 159.80. On the downside, first support is seen at the middle Bollinger Band at 156.90, while a more substantial floor emerges at the lower Bollinger Band near 154.00 if selling resumes below the recent pivot at 158.38.