The dollar has quickly fallen to 155 yen against the yen over the past week, and strategists warn that further yen weakness could trigger verbal intervention from authorities and put pressure on the Bank of Japan to raise interest rates.

The dollar has gained about 2.8% against the yen so far this month, making it one of the worst performers among major currencies. A move above 155 would take the greenback to its highest level since Nov. 22.

In the European session on Tuesday, the USD/JPY exchange rate changed slightly, hovering around 154. Any further increase will make it close higher for seven consecutive days, the longest period of gains since June this year.

"I think 155 is an important milestone," said Akira Moroga, chief market strategist at Aozora Bank. "I expect that when the yen falls to 155, the stance of the Japanese authorities will change, and the likelihood of the Bank of Japan raising interest rates will also increase."

Overnight index swaps show a 19% probability that the Bank of Japan will raise interest rates this week. At the beginning of this month, due to some media reports dampening market expectations for a rate hike by the Bank of Japan, the probability of a rate hike in December has fallen from about 60%.

Shigeto Nagai, head of Japan's economy at Oxford Economics, stated in a report last week, "The Bank of Japan's confusing communication suggests that the central bank may hold rates steady, waiting for more information from next spring's wage negotiations and U.S. policy developments."

Vishnu Varathan, head of economics and strategy at Mitsubishi UFJ Bank, stated, "The momentum and speed of the yen's depreciation this week is not comforting news for the Bank of Japan and the Ministry of Finance. If the dollar-yen exchange rate reaches 155 or higher, it is highly likely that the authorities will intervene verbally." He noted that a drop to 157 or 158 for the yen could increase pressure on the Bank of Japan to raise interest rates.

The direction of the yen will also depend on the Federal Reserve's policy meeting, which will take place a few hours before the Bank of Japan makes its decision. Varathan's colleague, Teppei Ino, head of global markets research at Mitsubishi UFJ Bank in Tokyo, pointed out, "Given the current trend of yen depreciation and the upcoming FOMC meeting just before the Bank of Japan's meeting, we should remember that if the dollar-yen exchange rate reaches 155 due to this event, the Bank of Japan may still suddenly decide to raise interest rates."

Article forwarded from: Jinshi Data