USD/JPY drops as BoJ signals potential rate hike despite political risks

The Japanese yen strengthened broadly following reports that the Bank of Japan sees potential for a rate hike before year-end, with USD/JPY falling 0.5% to 147.20. BoJ officials reportedly view steady progress toward their price target and believe a US trade deal could mitigate growth risks. While the central bank is expected to maintain current rates at the September 19 meeting, markets have already priced in approximately 50% probability of a hike by December. The yen's appreciation accelerated across major pairs, with EUR/JPY down 0.4% and GBP/JPY retreating 0.6%. Technical indicators show USD/JPY breaking below the 147.50 support level, opening potential for a test of 146.80. The development reinforces the BoJ's gradual shift away from ultra-loose monetary policy, though political uncertainties remain a wildcard. Traders should monitor upcoming BoJ communications and Japanese inflation data for further directional cues.