(Bloomberg) — Sign up for the Next Japan newsletter, for an inside view of the forces reshaping Japan, and what’s next for its businesses, markets and consumers.
The yen strengthened 2% Thursday, reversing a month of gradual decline, as traders lifted bets on Japanese interest-rate hikes and were on high alert to the risk of authorities wading back into the market to boost the currency.
The reversal in sentiment comes as investors focus on factors that may bolster the beleaguered currency, after weeks of questioning the long-term effectiveness of intervention by Japan and the US to support it. News from the nation’s biggest pension fund is also fueling renewed speculation of more positive fund flows.
The yen advanced to 155.52 per dollar in early New York trading, on track for its best day since Tokyo and Washington entered the market to prop up the currency just over a month ago. The rebound from a fall to 160 earlier this week underscores market jitters ahead of the Bank of Japan’s Sept. 18 policy decision, when the central bank is widely expected to raise rates.
“Yen buying may have emerged, particularly among overseas players, on speculation about an outsized rate hike,” said Hideaki Minami, director of the foreign-exchange spot trading team at Mizuho Bank. “However, it’s premature to conclude from today’s move that the yen’s weakening trend has reversed.”
Thursday’s gains were likely amplified by an unwind of speculative short positions in the yen, alongside hedging demand from domestic investors, said Chidu Narayanan, chief APAC strategist at Wells Fargo in Singapore. Such flows alone were unlikely to drive the yen much higher, he said, adding that a significant rally beyond current levels would require a surprisingly hawkish BOJ, fiscal prudence in Tokyo, and a weaker dollar.
The yen’s moves Thursday caught momentum after Federal Reserve Governor Christopher Waller said his next decision on interest rates will be “heavily influenced” by August inflation data, pushing traders to pare back expectations for the rate hikes in the US — weighing on the dollar. The Bloomberg Dollar Spot Index was down 0.5%.
Japan’s currency has been pressured by elevated oil prices and a wide interest-rate gap with the US despite Japan spending a record $96.4 billion over the past month to support the currency. The intervention was enhanced by US support, an additional factor that underscored the warning to speculators not to bet against the yen.
In April, authorities waited until a long Japanese holiday to intervene in the currency market for the first time since 2024. Investors are now speculating that Japan could employ a similar tactic during Silver Week, a three-day holiday which begins shortly after the BOJ’s policy meeting.
As concerns about intervention swirl, the latest BOJ data showed no signs of a major foray into the market by Japanese authorities on Wednesday. Still, Japan’s top currency official Atsushi Mimura told reporters he was unsatisfied with the yen’s current situation and pledged “to continue the battle on FX,” ratcheting up the Finance Ministry’s rhetoric.
“Mimura’s comments today were much stronger than his recent previous comments,” said Yusuke Miyairi, FX strategist at Nomura International, adding that his choice of words was significant given that the market has become more nervous about intervention risk.
“In this kind of environment, the likelihood of dollar-yen testing 160 is somewhat reduced, and the pair is likely to stay closer to the bottom of a 155-160 range,” he said.
There is still an unusually acute risk of financial-market turbulence from the BOJ’s meeting after US Treasury Secretary Scott Bessent stepped up his increasingly public pressure on Japan to raise interest rates. Any failure to follow Bessent’s barely camouflaged calls to raise rates would now not only surprise traders, but also send the yen tumbling.
BOJ board member Hajime Takata on Wednesday reinforced speculation among investors that the central bank could take a more aggressive approach than expected. He said a 25-basis-point hike “is not necessarily set in stone,” and that generally speaking, back-to-back rate hikes would be a possibility, too.
The swaps market has nearly fully priced a 25-basis-point rate increase this month and is factoring in a 75% possibility that the BOJ will deliver an additional hike in December, a faster pace of tightening than previously imagined.
What Bloomberg strategists say:
Maintaining that upward thrust beyond a week containing both FOMC and BOJ meetings will be a much higher bar. It would probably require a surprisingly dovish Federal Reserve alongside clear BOJ guidance pointing to successive rate hikes.
Neither prospect is likely to convince yen traders, who have repeatedly been left underwhelmed by Governor Kazuo Ueda.
— Mark Cranfield, Markets Live Strategist. Read more on MLIV.
The market is likely to remain on high alert for any signs of official yen buying, or official checks on the yen’s trading rates, which often comes before authorities enter the market.
“After any jumpy move, on any trading desk, the first thing anybody will say is ‘intervention?’” said Bart Wakabayashi, Tokyo branch manager at State Street Bank & Trust. “As we saw last night, I think the market will remain very sensitive, very jittery.”
–With assistance from Hideyuki Sano, Umesh Desai and Matthew Burgess.
(Updates prices, adds dollar move.)
More stories like this are available on bloomberg.com
