The yen strengthened sharply against the US dollar on Monday, climbing past levels seen after government intervention in early August, as traders speculated that Japanese authorities might take advantage of the US Labor Day holiday to support the currency.
The yen rose as much as 1.4% during the session, touching 154.04 per dollar, its strongest level since February. A rapid five-minute move occurred during the London morning session, before the currency settled around 154.58, still up 1.1% on the day. Over the first five trading days of September, the yen has gained 3.3% against the dollar.
Some strategists believe the yen's trajectory may finally be turning after more than a year of mostly declines. Lee Hardman, senior currency analyst at MUFG, noted that "this round of strength could prove more durable... the yen has scope to strengthen further." He pointed to widespread expectations of Japanese rate hikes as a supportive factor, along with potential capital repatriation by Japanese pension funds seeking yields through domestic allocations.
Monday's move comes after Japanese authorities conducted currency intervention totaling 15.4 trillion yen ($99.6 billion) in July-August, an unusual effort that also received additional backing from the US government. Since then, market focus has shifted to the Bank of Japan's next move, with the central bank's policy board meeting scheduled for next week.
US Treasury Secretary Scott Bessent has publicly pressed for a BOJ rate hike. Market pricing now reflects roughly a 75% probability that the central bank will raise borrowing costs by 0.25 percentage points to 1.25% by next week's meeting.
Growing speculation suggests the BOJ could follow with another hike in October, an uncommon back-to-back move aimed at avoiding a delayed response to inflation, which would likely provide additional support for the yen. A Tokyo-based fund manager said, "Three weeks ago I wouldn't have made this call, but consecutive hikes have become our base case. I think this is starting to make some short-term money uneasy, and I wouldn't be surprised by violent moves in FX as the market digests this risk."
However, some investors remain skeptical. Marc Richards, head of multi-asset at BNP Paribas Asset Management, said, "My question now is whether the BOJ really has the stomach to deliver a hawkish stance and follow through. I expect a 25bp hike with a relatively hawkish statement, but beyond that I have doubts about the path."
One investor noted that liquidity was thin ahead of the US holiday, with several unusually large trades hitting the market, though they could not confirm whether official intervention had occurred. Masayuki Nakayama, multi-asset strategist at Mizuho, said, "With US holidays reducing liquidity, many market participants remain highly alert to the risk of official intervention."
The yen's rapid appreciation has reignited concerns about a sharp unwinding of carry trades, echoing the market turmoil seen in the summer of 2024 after the BOJ raised rates to 0.25%. Jefferies analyst Shrikant Kale noted that while total carry trade size is difficult to estimate precisely, outstanding cross-border yen borrowing has grown by two-thirds from 216 trillion yen in December 2021 to 360 trillion yen by March this year. Kale said by that measure, "this cycle represents the largest accumulation of carry trades in three decades," which suggests the BOJ will act cautiously to avoid financial instability risks.
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