Japanese Yen hits six-and-a-half-month high on hawkish BoJ bets
- USD/JPY drops to a seven-month low as the Japanese Yen outperforms its major peers.
- BoJ rate hike expectations, capital repatriation and carry-trade unwinding support the Japanese Yen.
- US inflation figures take centre stage later this week ahead of the Fed’s September meeting.
USD/JPY extends its steep decline on Monday as the Japanese Yen (JPY) rallies against the US Dollar (USD), supported by hawkish Bank of Japan (BoJ) expectations, capital repatriation and the unwinding of Yen-funded carry trades.
At the time of writing, the pair trades around 154.42, down more than 1% on the day at its lowest level since February. Thin trading conditions due to the US Labor Day holiday may also be amplifying the move, with US stock and bond markets closed on Monday.
Markets have fully priced in a 25-basis-point (bps) interest rate increase to 1.25% at the BoJ’s September 17-18 meeting. Expectations that the central bank could tighten policy at a faster pace also support the Yen amid persistent inflation concerns.
Strategists at OCBC remain “tactically constructive on JPY” in the near term, but caution that with “a Sept BoJ hike now largely priced,” further gains will increasingly hinge on “whether expectations shift towards a faster subsequent pace of normalisation and whether the recent repatriation chatter translates into more visible flows.”
Speculation over another currency intervention has also resurfaced following the Yen’s sharp moves in recent days. Japan spent ¥15.4 trillion, around $98.66 billion, supporting the currency between July 30 and August 26, marking its largest intervention operation on record for a single month, Ministry of Finance (MoF) data showed, according to Reuters.
Meanwhile, the US Dollar struggles to benefit from rising Federal Reserve (Fed) rate hike expectations. Friday’s employment report showed that Nonfarm Payrolls (NFP) increased by 162K in August, well above the market forecast of 56K, while the Unemployment Rate held steady at 4.1%. Traders currently price in around a 58% chance of a Fed rate increase at the September 15-16 meeting.
Attention now turns to US inflation data for more clues about the Fed’s next move. The Producer Price Index (PPI) is due on Thursday, followed by the Consumer Price Index (CPI) on Friday. Hotter inflation readings could revive demand for the US Dollar and slow the decline in USD/JPY, while softer figures may add to selling pressure.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.
