The Japanese yen strengthened sharply against the US dollar on September 7, reaching as high as 154.04 per dollar, its strongest level since February, with an intraday gain of up to 1.4%. Over the past five trading sessions in September, the currency has climbed a cumulative 3.3%. Market participants are speculating that Japanese authorities may have taken advantage of thin liquidity during the US Labor Day holiday to step in, though some analysts believe the yen could be entering a more sustainable appreciation trend.
Lee Hardman, senior currency analyst at MUFG, suggests the yen is likely to strengthen further, supported by widespread expectations that the Bank of Japan will raise interest rates, alongside potential capital repatriation by Japanese pension funds seeking higher yields in domestic assets. Japanese authorities conducted massive intervention totaling 15.4 trillion yen (approximately $99.6 billion) in July and August, which unusually received backing from the US government.
The Bank of Japan is scheduled to hold its monetary policy meeting next week. With US Treasury Secretary Scott Bessent publicly pressing for higher Japanese rates, markets are currently pricing in roughly a three-quarters probability of a 25-basis-point hike to 1.25% at next week's meeting. There is also growing speculation that the central bank could opt for a rare back-to-back rate increase in October to prevent inflation from deteriorating further.
A Tokyo-based fund manager noted, "Consecutive rate hikes are becoming our base case," adding that the foreign exchange market has already begun pricing in such risks. However, some investors remain skeptical about the sustainability of the Bank of Japan's hawkish stance. Mark Richards, who leads the multi-asset investment team at BNP Paribas Asset Management, says the central bank will likely deliver a 25-basis-point hike next week with a relatively hawkish tone, but questions remain regarding the subsequent policy trajectory.
The yen's rapid appreciation has reignited concerns about potential unwinding of carry trades, echoing the market turmoil seen in the summer of 2024 after the Bank of Japan raised rates to 0.25%. Analysts at Jefferies point out that cross-border yen borrowing has surged from 216 trillion yen in December 2021 to 360 trillion yen by March this year, an increase of two-thirds, noting that "the current cycle represents the largest accumulation of carry trades in nearly three decades." As such, the central bank is expected to proceed cautiously with rate hikes to avoid financial instability. Market participants remain alert to the risk of official intervention during periods of reduced liquidity around US holidays.
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