The Japanese yen is poised for potentially sharp swings and continued depreciation in the coming week, as a three-day national holiday in Japan is expected to thin trading liquidity while investors remain disappointed by the central bank's lack of clear guidance on future rate hike trajectories. On Monday, the currency held steady near 156.86 against the US dollar, following a 1.3% decline on Friday after two Bank of Japan board members voted against the rate increase. Reports subsequently emerged that officials had contacted market participants for exchange rate quotes, a move typically interpreted as a precursor to official intervention, yet the yen only managed to pare its losses.
The yen recorded a weekly decline exceeding 2% last week, marking its steepest weekly drop in nearly a year. "Just as the yen had been largely firm heading into the BOJ meeting, the central bank has once again extinguished its rally," wrote James Reilly, senior markets economist at Capital Economics, in a research note. "It seems fair to say that whether the yen can stage a meaningful recovery against the dollar depends on developments from the US side."
The reported rate checks also underscore the risk that authorities may intervene once again to stem further yen weakness, a scenario that could trigger violent currency fluctuations and inflict losses on traders. With Japanese markets closed through Wednesday for the holiday, liquidity is expected to remain thin, providing an opportunity to amplify the impact of any potential official action. A similar window emerged during the Golden Week holidays in late April and early May, when the yen breached the 160 level and prompted Japanese authorities to step in. The latest round of intervention began in late July, with the US joining forces with Japan, driving the yen up by more than 6%.
The yen's appreciation peaked at 152.89 on September 8, and until last week, some investors had maintained a relatively optimistic stance toward the currency. "We had been deliberating whether USD/JPY might be approaching a turning point," noted Joey Chew, head of Asia FX research at HSBC, in a report. "Our current assessment is that recent developments (joint intervention, a second rate hike within just three months) will only stabilize USD/JPY rather than trigger a downtrend."
Following Friday's rate hike, BOJ Governor Kazuo Ueda delivered conflicting signals regarding the path of future tightening. While he pointed to a shift in the policy-setting landscape, suggesting a hawkish tilt, he also acknowledged difficulty in determining the terminal rate for the current tightening cycle and offered scant detail on the pace of future hikes. Swap markets now price in a less than 20% probability of another hike at the October policy meeting, while odds for a move in December stand near 90%.
The yen's rally earlier this month was driven by expectations of accelerated BOJ tightening, unwinding of carry trades, and speculation that Japanese pension funds might channel more capital into domestic assets. However, the Fed's rate moves and Ueda's comments have prompted some strategists to warn that USD/JPY could keep climbing if investors conclude the BOJ is struggling to keep pace with the Fed's tightening cycle. "Looking ahead, we believe the external environment will continue to pose headwinds for the yen," strategists Koichi Sugisaki and Hiromu Uezato at Morgan Stanley MUFG Securities wrote in a research report.
The BOJ raised its benchmark interest rate to 1.25% on Friday, addressing rising inflation and pressure emanating from Washington.
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