The Japanese yen has strengthened for a second straight session, breaking through the 158 and 157 marks against the US dollar to reach the 156 level.

On Thursday (September 3), the yen climbed to the 156 zone against the dollar, as investors priced in a 25 basis point rate increase by the Bank of Japan (BOJ) at its September 18 policy meeting. Market participants are also closely watching whether Japanese authorities might intervene to bolster the currency again during the three-day holiday that follows the BOJ's decision.

Intervention Speculation

On Wednesday (September 2), the yen rose 1.2% to 158.22 against the dollar, briefly sparking speculation among traders that Japanese officials might be contacting banks for rate checks — a move often seen as a precursor to currency intervention. However, as the trading day closed, the yen's gains narrowed to settle at 158.85, with no clear signs that authorities had taken direct action.

Marito Ueda, president of SBI FX Trade, commented, "I don't think the government has conducted rate checks or shown signs of intervention, but if the yen approaches the 160 level again, there are certainly many points of caution to consider."

Adding to the yen's momentum, BOJ board member Hajime Takata reiterated the possibility of substantial or consecutive rate hikes on Wednesday morning. He suggested that the central bank could take more aggressive measures than currently expected, noting that a 25 basis point increase "isn't necessarily a done deal" and that consecutive hikes remain a general possibility.

Overnight index swaps now fully price in a 25 basis point hike at the BOJ's September meeting, though market pricing suggests a larger 50 basis point move is considered unlikely.

Tony Sycamore, an analyst at ING, noted, "The yen's rise came after hawkish comments from BOJ board member Takata. The market is also focused on the US non-farm payrolls report due later this week, which will impact dollar-yen pricing in the short term."

One reason the market believes no substantive intervention occurred is that the yen's initial surge was smaller than the one seen during the coordinated US-Japan intervention a month ago. According to Japan's Ministry of Finance, the country spent a record $96.4 billion over the past month to support the yen after it fell to a 40-year low. Japanese officials have repeatedly stated that the key to assessing intervention necessity is the speed and disorderliness of currency moves, not any specific exchange rate level.

Analysts who previously spoke with reporters about the yen's trajectory and the US-Japan joint intervention argued that the currency's movement is primarily driven by the massive interest rate differential between Japan and other major economies, particularly the US. Additionally, the aggressive spending plans of the Ishiba administration have raised global investor concerns about Japan's fiscal outlook. These factors continue to weigh on the yen's medium-to-long-term prospects.

BOJ Rate Decision and Intervention Expectations

Regardless, yen traders are now intently focused on whether the BOJ's upcoming September policy meeting will deliver a rate hike and by how much. They are also speculating whether Japanese authorities might intervene again during the three-day holiday — the so-called "Silver Week" — immediately following the meeting, when market liquidity tends to be thinner.

US Treasury Secretary Scott Bessent has previously stated he expects BOJ Governor Kazuo Ueda to "do the right thing" on monetary policy, while describing the yen's recent moves as "well contained." He has also defended the US-Japan coordinated intervention to support the yen, arguing that any extreme yen volatility could push US interest rates higher.

Against this backdrop, the yen continued its advance on Thursday, breaking through both the 158 and 157 levels to head toward 156. As of 3 PM Tokyo time, the dollar-yen rate stood at 156.68.

Samara Hammoud, a strategist at Commonwealth Bank of Australia, said, "Silver Week could add to yen uncertainty, mainly because liquidity tends to diminish during the holiday period. As time goes on, dollar-yen could test pre-intervention highs again. If this happens quickly, especially around the BOJ meeting, the risk of renewed intervention rises significantly."

Japanese Finance Minister Katsunobu Kato and Bessent have both indicated they are prepared to re-enter the market without hesitation if necessary.

Yen speculative positioning also works against the currency: hedge funds initially cut their bearish bets after the intervention but have since rebuilt short positions. With Bessent increasing public pressure for a BOJ hike, the upcoming meeting carries an unusually high risk of financial market turbulence. If Ueda fails to follow Bessent's barely veiled calls for a rate increase, it could not only surprise traders but also trigger a sharp yen selloff.

Mark Cranfield, a Bloomberg strategist, remarked that the yen faces a higher hurdle to maintain its current upward momentum through the week when both the Federal Reserve and the BOJ hold policy meetings. This would likely require a Fed that is more dovish than market expectations, along with clear BOJ guidance on consecutive hikes. However, neither scenario is currently priced in by yen traders, and Ueda has repeatedly disappointed them in the past.

For the Fed, the situation is even more complicated. In his first appearance at the Jackson Hole symposium, Fed Chair Warsh reaffirmed the central bank's anti-inflation stance, hinting at potential rate hikes if inflation proves sticky — a stark contrast to the dovish Fed posture that the yen would need to continue its rally.

Ueda noted, "With both Fed and BOJ meetings approaching, and the holiday immediately after, the market is in intervention-watch mode. Once dollar-yen approaches the 160 zone, another intervention is entirely possible."