USD/JPY near 158 as BoJ leans against October rate hike

The Bank of Japan looks set to skip October. Bloomberg reported on Tuesday that BoJ officials look inclined to avoid consecutive rate increases at the October 30 meeting, keeping December open instead after the September 18 decision took the rate to 1.25%. On Tuesday the dollar lost ground to all its major peers — losing least against the yen, with USD/JPY snapping back to 158.50 as US yields rose. MarketRadar's snapshot showed the pair at 158.36, down 0.1% on the day.

One number explains the trade: 10%. Swaps imply barely a one-in-ten chance of an October hike, while December itself carries an 88% implied chance.

The BoJ has not raised rates in two consecutive months since 1980. Four decades of letting each move settle before the next make a breather the natural call, especially after September completed two hikes in a single quarter — the quickest tempo since 1990. The September step itself came under pressure from US Treasury Secretary Scott Bessent, who has pushed Tokyo to keep normalizing policy and let the yen strengthen. Economists polled last month lean the same way as the swaps — roughly a third forecast December, and more than half see the next step slipping into January.

The carry gap is doing the rest. With the Fed at 3.75%-4.00% and the BoJ at 1.25%, the policy spread sits at roughly 250 to 275 basis points, and the 10-year Treasury at 5.2% runs about 220 basis points above the 3.0% Japanese government bond. That spread is the fuel for the carry trade that has lifted USD/JPY from the September low near 152.80 back to the 158 handle.

Why it matters

For FX positioning, this is a story about timing, not direction. Nobody asks whether the BoJ hikes again this year — 88% December odds say yes — only when. A December hike, paired with the Fed's own live December meeting (hike odds near 68-70% after the October 7 FOMC minutes), leaves the rate gap as the single variable that decides USD/JPY into year-end. The price action backs the stalemate: 159.00 has not traded since September 24, and since October 5 every session has closed inside roughly 157.50 to 159.00. Tuesday's low dipped below the 50-day moving average near 158.00 and held just above the 200-day average, the two separated by about 33 pips. That is compression, and compression resolves with a catalyst — it just hasn't arrived yet.

One risk is the one nobody prices politely: intervention. Japan's finance ministry and the US Treasury bought yen jointly on July 31 when USD/JPY touched 164. Japan's finance minister and the US Treasury chief both happen to be in Bangkok for IMF meetings that run through Saturday. The 159-160 zone is where officials start talking. Rabobank argued earlier this month that the BoJ's steady hikes are quietly eroding the yen's carry appeal, and ING's note on Tuesday warned the dollar screens 1.1% overvalued across G10 yet lacks a reversal catalyst — the same tension runs through this trade.