Summary
The USD/JPY rose above 162 on growing expectations for Fed rate hikes, reaching its highest level in around 40 years. The BOJ raised the policy rate by 25 bp to 1.00% and signaled a hawkish stance. However, curbing yen weakness is likely to take time because markets are not yet convinced of the BOJ's commitment to sustained tightening. A recovery in imports after the reopening of the Strait of Hormuz, a deterioration in Japan's trade balance, and fiscal concerns are yen-negative factors, while intervention concerns and speculation about an additional BOJ rate hike in September should provide support. Fed rate-hike expectations are likely to support the dollar in the short term, but that support may not last given lower crude oil and gasoline prices and political pressure for rate cuts. We have pushed back our forecast for the USD/JPY peak, but maintain our upside forecast of 165.