TOKYO--The yen has been weakening this week as the Federal Reserve's hawkish policy stance overshadowed expectations of an imminent rate increase from the Bank of Japan. That trend could continue.

The yen's depreciation has been in sharp contrast with its gains early this month, which had been partly driven by aggressive pricing for BOJ rate hikes to curb inflation.

The Fed on Wednesday raised its rates for the first time in three years, as widely expected, with the vast majority of officials penciling in one more hike this year via its dot plot.

Higher U.S. yields continue to bolster the dollar, keeping pressure on the yen despite widespread expectations that the BOJ will raise its benchmark rate by 25 basis points to 1.25% on Friday.

The hawkish-looking Fed places the Japanese central bank under even greater pressure to deliver a rate hike and signal an aggressive stance on further action, said Eiji Kinouchi, an analyst at Daiwa Securities.

Although Japanese monetary conditions are expected to tighten, analysts say the interest-rate gap between the U.S. and Japan, which has been a major driver of the yen's weakness over many years, is unlikely to narrow significantly.

"If the Fed raises interest rates as markets project--more than three hikes by the middle of next year--short-term rate differentials between the U.S. and Japan will narrow little under the current policy path priced in for the BOJ," said Keisuke Tsuruta, a strategist at Mitsubishi UFJ Morgan Stanley Securities.

By comparison, investors are anticipating a slower pace of Japanese increases beyond the BOJ's expected hike on Friday. Overnight index swaps are pricing in a 66% chance of another 25 basis point hike by the year's end and a 41% chance of a second follow-up move by March 2027.

The Japanese currency recently traded at 155.72 yen against the dollar in late Asian trade Thursday. That's a fairly large drop for the yen considering it started the week around 153 yen but still a long way from the levels around 160 yen at the start of September.

Though the expected rate differentials argue for dollar strength, there's a chance that the yen could regain ground in the near term. With Japan heading into a long weekend right after the BOJ decision, Daiwa's Kinouchi warns that any bold signals from the central bank could rattle markets--similar to the turmoil in summer 2024, when a BOJ rate increase, alongside speculation over the Fed's policy path, prompted a surge in the yen and a steep selloff in Tokyo equities.

Japanese financial markets will be closed for national holidays from Monday through Wednesday.