Citi Sees Bank of Japan Hiking to 1.25%, Yen's Path Hinges on Board Votes and Fed

The Bank of Japan is expected to raise its benchmark interest rate to 1.25% at its upcoming meeting, but the yen's direction will be dictated by internal political dynamics and the Federal Reserve's next move, according to a research report from Citigroup.

While a rate hike from the BoJ is largely priced in by financial markets, investors are closely watching the votes of two specific policy board members, the report noted.

Political Dynamics Under Scrutiny

Analysts at the Wall Street bank highlighted that the voting behavior of board members Toichiro Asada and Ayano Sato will be a key focus. Both are considered to be aligned with the reflationary economic agenda of Prime Minister Sanae Takaichi's government.

• A dissenting vote: If both members vote against a rate hike, it would reinforce market perceptions of political pressure on the BoJ to maintain low borrowing costs. Citi suggests this scenario could push the USD/JPY pair back towards the 155 level.
• A unanimous decision: Conversely, a unanimous vote to hike rates could signal that the Takaichi government is yielding to pressure from U.S. Treasury Secretary Scott Bessent, who has called for Japan to normalize its monetary policy.

Fed Decision Looms Large

Ad

In the short term, the yen's performance remains heavily dependent on the Federal Reserve's interest rate decision next week, Citi analysts stated. While current momentum could temporarily push the dollar down to around 152 yen, a sustained move is not guaranteed.

An unexpected rate hike by the Fed, coupled with resilient U.S. equity markets, would make it difficult for the dollar to remain below 155 yen. Even if the Fed holds rates steady, a positive stock market reaction could limit the yen's appreciation, keeping the USD/JPY pair supported above the 150 mark.

Long-Term Outlook

Looking further ahead, Citigroup anticipates a more defined downtrend for the USD/JPY exchange rate. This view is based on the expectation that the interest rate differential between the U.S. and Japan will gradually narrow, triggering a larger-scale unwinding of yen carry trades.

Market participants will also monitor the BoJ's "Summary of Opinions," scheduled for release on October 1, for signs of continued opposition to monetary tightening from government representatives. At the June meeting, a Cabinet Office representative reportedly resisted an increase to 1%.