Summary
The US has elevated currency policy to a leader-level issue after the yen continued to weaken despite coordinated intervention at the end of July, with Washington viewing the yen as substantially undervalued. This reflects both the need for consistency with US currency policy toward China and the broader US trade strategy. Against this backdrop, the BOJ raised its policy rate to 1.25%, with December now seen as the most likely timing for the next hike. Expectations of further Fed rate hikes, expansionary fiscal policy in both Japan and the US, and Japan's trade and digital deficits remain sources of yen weakness. However, the USD/JPY rising above 160 would likely prompt stronger warnings from the Japanese and US authorities and raise the prospect of further coordinated intervention, while the 200-day moving average should also limit upside. The risk of further yen weakness has receded, but a sustained turn toward yen appreciation will require continued BOJ rate hikes and restored confidence in fiscal discipline. We therefore make only a modest downward revision to our forecast range for the USD/JPY.