Wall Street Divided on Further Yen Gains as BOJ Rate-Hike Outlook Comes Into Focus

The Japanese yen has extended its strength into the 153-per-dollar range, but major Wall Street firms are split on how much further it can climb.

Bloomberg reported on Sept. 9 that the yen rose as much as 0.5% intraday against the dollar to 153.25. It had reached its strongest level since mid-February in the previous session.

Expectations for a Bank of Japan rate increase have underpinned the yen's recent advance. The BOJ is said to be considering raising its benchmark rate by 0.25 percentage point this month in response to inflation pressures.

Even so, some market participants say a substantial amount of tightening expectations has already been priced into the exchange rate. That suggests the BOJ would need to deliver a more hawkish signal than markets expect for the yen to strengthen further.

Eric Nelson, a strategist at Wells Fargo, pointed to the BOJ rate path already reflected in markets and said it would be very difficult for the central bank to surpass those expectations. Even if a rate hike goes ahead, the yen's gains may remain limited unless expectations for further tightening increase meaningfully.

JPMorgan highlighted the possibility that yen strength itself could reduce the need for additional BOJ rate increases. Meera Chandan, co-head of global FX strategy at JPMorgan, said Japanese authorities would want to avoid not only excessive yen weakness but also excessive strength. As dollar-yen approaches the low-150s, she said, the hurdle for further declines is likely to rise.

Bank of America took the opposite view. It said the yen could find additional momentum if the BOJ accelerates the pace of rate increases. Alex Cohen, a foreign-exchange strategist at BofA, said faster BOJ rate hikes are a key precondition for further yen strength. If the currency holds near current levels, repatriation of overseas funds by Japanese exporters could also become a fresh source of support.

Manulife Investment Management also sees room for continued yen gains if the BOJ confirms the possibility of additional tightening. The key question, the firm said, is what signal the BOJ sends on the possibility of a second additional rate increase before year-end.

Federal Reserve policy is another variable. Citigroup said next week's Fed rate decision will shape the yen's near-term direction.

Citigroup strategists said the current decline in dollar-yen could continue toward 152. However, if the Fed were to raise rates, they expect it would be difficult for dollar-yen to settle sustainably below 155.