28.08.202511:01 Forex Analysis & Reviews: Bank of Japan Prepares Markets for a Rate Hike

Today's remarks by Bank of Japan board member Junko Nakagawa provide clear evidence that the central bank is preparing markets for a rate hike. In her brief speech, Nakagawa reaffirmed the bank's intention to continue raising the key interest rate, provided conditions allow.

This confirmation of a tightening bias—albeit conditional on favorable economic conditions—leaves no doubt about the regulator's priorities. Markets immediately reacted to Nakagawa's comments: the yen strengthened against major currencies, while Japanese stock indices saw a brief decline.

However, the context of Nakagawa's statement is critical. The Bank of Japan has long adhered to an ultra-loose monetary policy, and any deviation from this course requires careful market preparation. Nakagawa's remarks are likely part of that strategy, aimed at reducing potential shocks.

A rate hike in Japan could significantly impact the economy. A return to more conventional monetary policy in one of the world's largest economies could influence capital flows, interest rates, and currency markets.

The main factor holding the central bank back from policy change is uncertainty surrounding trade—particularly external trade. Shifts in trade agreements, new tariffs imposed by the U.S., and restrictions could trigger serious fluctuations in Japan's export and import flows, directly affecting economic activity.

"At present, some progress has been made toward creating conditions suitable for a rate hike, as uncertainty surrounding U.S. tariff policy has somewhat decreased, but it remains high. For now, we believe it is appropriate to continue supporting the economy with current monetary easing," Nakagawa told reporters. "If economic and inflation forecasts are confirmed, the bank will continue to raise the policy rate and adjust monetary policy accordingly."

By rephrasing the BoJ's current stance, Nakagawa indicated she intends to avoid fueling market speculation about a rate hike ahead of the next board meeting on September 19. Her remarks suggest that a decision at that meeting is highly unlikely.

Speculation about a rate hike intensified after U.S. Treasury Secretary Scott Bessent took the unusual step of saying the Bank of Japan is lagging behind in the fight against inflation. Signs of stable economic activity and volatile price growth have strengthened expectations, pushing yields on 10-year Japanese bonds to their highest level in 17 years earlier this week.

Currently, traders price in roughly a 60% probability of a rate hike by the end of October, according to the movement in the overnight index swaps. This is up from around 40% at the start of last month.

As for the current technical picture of USD/JPY, buyers need to break the nearest resistance at 147.25. This would open the way toward 147.75, though breaking higher will be challenging. The furthest target is the 148.20 level. In the event of a decline, bears will attempt to take control at 147.00. If successful, a breakout of this range would deal a serious blow to the bulls and push USD/JPY down to 146.60, with prospects of extending to 146.20.