The Japanese yen has had a spectacular bounce back against the US dollar as it broke below the closely watched 155-per-dollar level as investors increasingly bet that the BOJ will raise interest rates at its September policy meeting.
The yen rose as high as 152.89 per dollar on Tuesday — its highest level since February — before giving up some of those gains. The currency has risen by around 4% from around 160 per dollar just last week, so it is one of the strongest-performing major currencies in recent trading.
The move overnight changed the outlook for the USD/JPY currency pair and posed a bigger question for global investors: Can the yen continue to go towards the low 150s, or will the BOJ try to slow the pace of appreciation?
BOJ Rate Hike Expectations Rise Sharply
The biggest driver of the yen’s rally is the expectation that the BOJ will hike borrowing costs at its September 17-18 policy meeting.
Markets are now pricing in a 25 basis point rate hike (that would take the BOJ policy rate to around 1.25%). BOJ Governor Kazuo Ueda has also said that the central bank will discuss a September hike as well — partly because inflation risks are rising.
Japan’s economic data have bolstered the case for policy normalisation. The country’s second-quarter GDP growth was revised up to 1.4% annually, while real wages rose by 2.4% year-on-year in July. All these indicators suggest domestic economic conditions may be strong enough to withstand another gradual rate hike.
Why 155 Is Such an Important Level
The break below 155 is significant because it’s more than a psychological threshold.
The sharp fall in USD/JPY has triggered stop-loss orders and pushed investors who had been betting against the yen to close those positions. Short covering can speed up currency movements because traders buying back yen put more upward pressure on the currency.
The move is also hurting the popular yen carry trade. Investors have borrowed yen at relatively low interest rates and put it in higher-yielding assets elsewhere for years.
As the yen appreciates, those trades become less profitable. Investors may then have to buy yen to repay their borrowing, so there is another source of demand. Reuters said the latest surge was already hitting carry-trade positions and investors were reevaluating exposure.
Could the Yen Move Towards 150?
USD/JPY is now below 155, and market attention is shifting to the 152 area and possibly low 150s.
However, the next leg of the yen rally will hinge on whether BOJ delivers a hike (and more importantly, what it signals about future increases).
A straightforward 25 basis point hike may already be priced into market prices. Investors could then pay more attention to Governor Ueda’s comments and the central bank’s guidance on whether further increases might come afterwards.
The BOJ has been reluctant to tighten too quickly because an aggressive move would disrupt financial markets and drive up borrowing costs. Reuters analysis published this week suggests the central bank is leaning towards a measured 25 basis point rise rather than a much larger move.
US Inflation Data Could Change the Equation
The yen’s rally is also happening ahead of important US economic data.
US inflation figures due this week could set the tone for expectations of what will happen next from the Fed. If inflation is hotter than expected, it will boost expectations that US interest rates will rise (which supports the dollar) and limit yen gains.
On the other hand, weaker US inflation could reinforce expectations of easier US monetary policy and narrow further the perceived advantage of holding dollar assets.
This makes the coming days especially important for USD/JPY traders as now both Fed and BOJ policy paths are influencing the currency pair.
Japan Also Has an Intervention Option
Japanese officials have said before that excessive currency volatility could lead authorities to intervene in foreign exchange markets.
Japan’s top currency diplomat recently said authorities are on alert and ready to act if disorderly moves continue.
But the yen rally now is being driven much less by official action than changing monetary-policy expectations and market positioning.
What Should Investors Expect Next?
The Japanese yen breaking below 155 is a major shift from the weakness of earlier this year.
The main things to watch now are the BOJ’s September 17-18 decision, US inflation data, Fed expectations, Japanese wage growth, and unwinding of yen carry trades.
If the BOJ signals a sustained tightening cycle and US inflation softens, then the yen could strengthen further to the low 150s, but a hawkish Fed, stronger US inflation, or a cautious BOJ may cause USD/JPY to rebound.
For now, the yen falling below 155 has changed the market narrative. What started as a sharp currency recovery is increasingly becoming a test of how quickly Japan can normalise monetary policy without destabilising markets.
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