FOMC Raises the BoJ's Bar: Can It Cap USD/JPY Below 158 and Defend JGB Confidence via Twist Flattening?

An important factor is that the outcome of the FOMC meeting likely raised market expectations for the Bank of Japan ahead of its policy announcement on September 18. The hawkish FOMC outcome intensified upward pressure on the dollar, with USD/JPY rebounding to the ¥156 level; if it reaches ¥158.7, CTAs and other speculators may resume yen selling (going long USD/JPY). With this in mind, a +25bp rate hike or merely suggesting the possibility of further rate hikes may not be an adequate outcome for the BoJ meeting, which must curb yen weakness while stabilizing the JGB long-term zone and yen interest rate volatility. We consider three scenarios based on the extent to which the BoJ meets these heightened expectations, with key criteria including USD/JPY, 2-year and 10-year JGB yields, and yen interest rate volatility. First, "benign hawkishness": 2-year JGB yields rise significantly while 10-year yields remain flat or decline slightly and yen rate volatility stabilizes;