As interest rate hike bets fade, the yen is set to record its largest weekly decline of the year

As bets on another interest rate hike by the Bank of Japan quickly fade, the yen is heading for its worst week in a year. On October 10, the yen traded around 153 against the dollar during the Asian morning session, maintaining its lowest level since mid-February this year. Since the beginning of the week, the yen has accumulated a decline of nearly 4%, poised to record its largest single-week drop since early October last year. The sharp decline in the yen's exchange rate is primarily due to market concerns that the unexpected victory of fiscal dove Sanae Takaichi will reduce the likelihood of the Bank of Japan raising interest rates again this year. Sanae Takaichi, who is set to become Japan's first female prime minister, stated on Thursday that the Bank of Japan is responsible for formulating monetary policy, but any decisions must align with government objectives, which has intensified market doubts about the independence of the country's central bank. Political Shift Leads to Significant Downgrade in Rate Hike Bets The market's pessimism regarding Japan's monetary policy outlook is closely related to the backdrop of Sanae Takaichi's impending assumption of office. Investors generally believe that her fiscal policy stance leans dovish, which could pose political resistance to the Bank of Japan's future rate hike path. Carol Kong, a currency strategist at Commonwealth Bank of Australia, stated, "The market still believes that Takaichi's leadership will make it politically difficult for the Bank of Japan to raise rates." With the changing political landscape, traders have significantly adjusted their expectations for the Bank of Japan's policy. According to market pricing, traders currently estimate the likelihood of a rate hike at the Bank of Japan's December meeting to be around 45%. For the longer-term path, the market has fully priced in expectations for a 25 basis point hike in March next year. This indicates that investors have placed hopes for tightening monetary policy in the nearer term further into the future. Meanwhile, expectations for intervention by Japanese authorities in the foreign exchange market are also diminishing. According to Carol Kong's analysis, recent comments by Finance Minister Shunichi Suzuki regarding the foreign exchange market suggest that "the likelihood of immediate foreign exchange intervention is low, which may encourage the market to further sell off the yen."