The yen broke through the 156 mark overnight, as the Federal Reserve's hawkish rate hike pushes the Bank of Japan to a "high-pressure moment."

The yen tumbled after the Federal Reserve delivered a hawkish rate hike, raising the stakes for the Bank of Japan's policy meeting on Friday. Strategists warned the currency could keep weakening unless officials convince the market that more tightening is coming. The Fed on Wednesday raised rates for the first time since 2023 and projected further increases, prompting traders to bet on three more hikes by the middle of next year. That threatens to keep the US-Japan rate gap wide even as the market expects the BOJ to raise its own policy rate this week. Driven by the Fed's move, the yen fell as much as 1% in overnight trading to 156.42 per dollar. That followed a sharp rebound earlier this month, fueled by expectations of faster BOJ tightening, the unwinding of yen-funded carry trades and speculation that Japanese pension funds may shift more money into domestic assets. "The pressure is certainly on Japan to both hike and sound hawkish to minimize the damage," said Glenn Yin, head of research at ACCM in Melbourne. If the BOJ disappoints, "a near-term test of the 160 handle is not a write-off." The bar is high. Overnight index swaps have almost fully priced in a 25 basis-point hike, leaving traders focused on BOJ Governor Kazuo Ueda's post-meeting press conference for clues on the pace and scope of further tightening. Hawkish board member Hajime Takata has even left the door open for a supersized or consecutive hike. The yen's renewed slide gives the BOJ more reason to highlight upside inflation risks, said Rinto Maruyama, senior rates and FX strategist at SMBC Nikko Securities. He said rising oil prices could give policymakers reason to tighten further. The hike expected Friday would bring Japan's policy rate into the estimated range of neutral, making it unlikely officials will signal a 50 basis-point hike or consecutive increases, Maruyama said. If the meeting is read as dovish, 158 would be the next upside target for the dollar-yen, he said. That means the yen is vulnerable if investors decide the BOJ's tightening cycle can't keep pace with the Fed's. Maruyama sees the dollar-yen gradually climbing back toward 160 over time if US rates rise faster than Japan's. Still, there are reasons to expect the yen's fresh selloff won't be as violent as previous ones. Carry traders have been burned by the currency's recent rebound, while hedge funds have trimmed bearish positions. Leveraged traders halved their bearish yen bets in the week through Sept. 8, according to Commodity Futures Trading Commission data. The threat of another intervention could also temper the yen's decline. Japan and the US have shown a willingness to jointly enter the market, and US Treasury Secretary Bessent has continued to signal support for a stronger yen. A hike on Friday may not be enough to support the yen. The BOJ "probably won't take as hawkish a stance as the Fed, which could be a direct catalyst for yen weakness," said Akira Moroga, chief market strategist at Aozora Bank. He sees 158.50 per dollar, around the 200-day moving average, as the next key level.