Bank of Japan's Hawkish Credibility Questioned, Market Bets on October as Next Rate Hike Window

On July 30, the persistent depreciation of the yen is forcing the Bank of Japan to face increasing policy pressure. Investors warn that if the BOJ does not accelerate the pace of interest rate hikes to curb inflationary pressures, its credibility in financial markets could be undermined. The market widely expects the BOJ to maintain its interest rate unchanged at its policy meeting this Friday. However, investors are more focused on whether Governor Kazuo Ueda will signal a faster tightening of monetary policy in the future. Last month, the BOJ raised its policy rate by 25 basis points to 1%, another step in the recent cycle of consecutive rate hikes. Nonetheless, derivatives markets show that traders currently only expect the BOJ to hike rates by another 25 basis points by January next year. Meanwhile, Japanese government bonds and the yen have been under sustained pressure this year. The government's plan to expand fiscal spending has exacerbated market concerns about Japan's debt size and long-term inflation, further increasing the pressure on the BOJ to adjust its policies. This month, the yen fell below the 163 yen to the dollar mark for the first time since 1986. Despite repeated warnings from the Japanese government about possible foreign exchange market intervention, the yen's weak trend has not been significantly reversed. The yield on Japan's 10-year government bonds has also risen to its highest level this century, approaching 3%.