JPMorgan Chase believes the Bank of Japan (BOJ) is facing an increasingly difficult policy cycle. With rising pressure on the yen to depreciate, the BOJ may need to raise interest rates sooner than expected; however, if the September rate hike is interpreted by the market as a direct response to the currency's decline, investors may continue to bet on even faster subsequent rate hikes, increasing uncertainty surrounding policy expectations.
This risk is particularly pronounced in the current environment. The BOJ just raised rates in June, and if it acts again in September, the interval will be only three months, significantly faster than the previous pace of "gradual rate hikes followed by observation of economic impact." JPMorgan Chase believes that once the market develops a pricing pattern of "the weaker the yen, the more likely the BOJ will raise rates," the pace of subsequent rate hikes may become increasingly driven by market pressure, making it more difficult for the BOJ to stabilize expectations.
This will increase the sensitivity of the yen and Japanese government bonds to exchange rate fluctuations. Therefore, JPMorgan Chase predicts that the yen's depreciation may prompt the BOJ to adjust its policy in September and December, thus further accelerating the normalization of monetary policy.
