The Japanese yen strengthened to its highest level since May on Monday, extending a sharp recovery against the US dollar as investors increased bets that the Bank of Japan could raise interest rates later this month and as memories of Japan’s recent currency intervention kept traders cautious about betting against the yen.
The dollar fell below ¥155 for the first time since May, with the yen extending gains that began last week. The currency has gained momentum after a sudden jump on Thursday triggered a reassessment of expectations surrounding Japanese monetary policy. Reuters reported that the yen rose more than 2% against the dollar during that session as traders increased wagers on a possible Bank of Japan rate hike.
The latest move marks a significant turnaround for a currency that had been trading close to multi-decade lows earlier in the summer. Japan intervened aggressively in foreign-exchange markets during the period from late July through August, spending about ¥15.4 trillion, or roughly $98.7 billion, to buy yen and sell dollars. The intervention helped pull the currency away from levels near ¥164 per dollar toward the ¥155 area.
The scale of the operation has left investors wary of pushing the yen sharply weaker again. Japan’s foreign reserves fell by $79.6 billion in August, the largest monthly decline on record, largely reflecting the intervention. The operation also involved selling foreign securities, including US Treasury holdings, and was carried out with coordination from the United States, according to Reuters.
Now, however, monetary policy expectations are becoming an additional source of support for the Japanese currency. Financial markets are increasingly pricing in a 25-basis-point increase in the Bank of Japan’s policy rate at its September 17-18 meeting, which would take the rate to 1.25%. A BOJ rate increase would narrow the interest-rate gap between Japan and other major economies, potentially making yen-denominated assets more attractive.
The prospect of tighter policy has gained credibility after comments from Japanese officials and policymakers. Takuji Aida, an economic adviser to Prime Minister Sanae Takaichi, said he expects the BOJ to raise rates in September and potentially continue increasing borrowing costs into 2027. His comments are particularly notable because he has previously been associated with a more dovish approach to monetary policy.
The BOJ has also become increasingly sensitive to inflation. A weaker yen raises the cost of imported energy, food and other goods, making currency movements an important consideration for policymakers. With oil prices rising sharply amid renewed conflict involving the United States and Iran, pressure on Japan’s import bill could increase further.
Higher oil prices present a complicated backdrop for the yen. Brent crude climbed toward $98 a barrel on Monday as tensions around the Strait of Hormuz intensified. Japan relies heavily on imported energy, meaning a sustained oil-price increase could worsen its trade position and increase inflationary pressure.
At the same time, the Federal Reserve outlook is affecting the dollar side of the exchange-rate equation. Investors are waiting for US inflation data that could determine whether the Federal Reserve raises interest rates at its September meeting. A stronger-than-expected US jobs report last week increased expectations that the Fed could tighten policy, but uncertainty remains over how inflation will respond to higher energy prices.
That leaves the yen caught between two competing forces. A more hawkish Federal Reserve could support the dollar, while a more aggressive BOJ could strengthen the yen. Recent market movements suggest traders are increasingly giving greater weight to the possibility of Japanese monetary tightening.
The currency’s rapid appreciation also raises questions about whether Japanese authorities will intervene again. Officials have repeatedly emphasized their willingness to act against disorderly currency movements, although policymakers generally prefer market forces to determine exchange rates. The massive intervention conducted in August demonstrated that Tokyo is prepared to spend substantial sums when it believes currency volatility has become excessive.
For traders, the ¥155 level has therefore become an important psychological and technical threshold. The yen’s move toward that level could encourage further short covering among investors who had positioned for continued depreciation. A sustained break below ¥155 could potentially accelerate that process, particularly if BOJ rate-hike expectations continue to strengthen.
The rally could also have wider consequences for global markets. The yen has traditionally been a major funding currency for carry trades, in which investors borrow at relatively low Japanese interest rates and invest in higher-yielding assets elsewhere. A stronger yen can make those positions less attractive and encourage investors to unwind them, potentially increasing volatility in global stocks, bonds and emerging-market currencies.
Japanese equities could also face mixed effects. A stronger yen reduces the value of overseas earnings when they are converted back into Japanese currency, potentially weighing on exporters. At the same time, a stronger domestic currency lowers the cost of imported commodities and other inputs, benefiting companies that depend heavily on foreign supplies.
The yen’s latest advance therefore represents more than a simple currency-market move. It reflects a fundamental reassessment of Japan’s policy outlook following a period of extraordinary intervention and renewed concern over inflation.
Whether the rally continues will depend heavily on the BOJ’s September decision, upcoming US inflation data and the direction of global energy prices. For now, the combination of intervention risks and rising expectations for higher Japanese interest rates has made betting against the yen considerably more difficult.
