The yen climbed sharply for a second consecutive day, reversing a slow decline seen over the past month. Traders are increasing their wagers on a near-term Japanese interest rate hike while staying highly alert to the possibility of renewed official intervention in the currency market. This shift in market sentiment comes as investors begin focusing on factors that could support the beleaguered currency, following weeks of skepticism about the long-term effectiveness of coordinated Japan-U.S. efforts to shore up the yen.
Adding to the cautious mood, news involving Japan's largest pension fund has once again fueled speculation that capital flows may tilt more favorably toward the yen. On Thursday, the currency strengthened as much as 2% against the U.S. dollar, reaching its strongest level since August 3rd. Earlier this week, the yen had weakened to 160 per dollar before rebounding, highlighting the tense atmosphere just days ahead of the Bank of Japan's policy meeting on September 18th, where a rate increase is widely expected.
Where to begin with market drivers
“There could be yen buying, especially from overseas, on speculation that the BOJ could surprise with a larger than expected hike,” said Hideaki Minami, head of the foreign exchange spot trading team at Mizuho Bank. He cautioned, however, that “it's premature to say that the yen's weakening trend has reversed based on today's move alone.”
Chidu Narayanan, Asia Pacific chief strategist at Wells Fargo in Singapore, noted that the unwinding of speculative short positions in the yen, combined with hedging demand from domestic Japanese investors, may have amplified Thursday's rally. Even so, he argued that these types of flows alone are unlikely to generate sustained, significant yen appreciation. For the currency to move substantially higher from current levels, Narayanan says it would require a more hawkish-than-expected signal from the BOJ, continued fiscal prudence from Tokyo, and a softer U.S. dollar.
Why just a handful of factors matter now
Despite Japan's record spending of $96.4 billion over the past month to defend the yen, persistent pressures remain, including elevated oil prices and a still-massive interest rate differential between Japan and the U.S. Washington's involvement in supporting the yen has also served as a clear warning to speculators against betting against the currency. In April of this year, Japanese authorities opted to intervene during an extended domestic holiday, marking their first foray into the market since 2024. Now, investors suspect Tokyo might deploy a similar strategy during the upcoming “Silver Week,” a three-day stretch of holidays that begins shortly after the BOJ concludes its policy meeting.
Concern over intervention is running high, yet BOJ data from Wednesday showed no clear signs that authorities had engaged in significant market action. However, Japan's top currency official, Atsushi Mimura, told reporters he was not satisfied with the current state of the yen, pledging to “continue the battle in the foreign exchange market,” reinforcing the finance ministry's firm rhetoric. Yusuke Miyairi, a currency strategist at Nomura International, observed that Mimura's statements “were much stronger in tone than what we have heard from him recently.” Miyairi added that given the market's heightened sensitivity to intervention risks, Mimura's choice of words is particularly notable. “In this environment, the probability of dollar-yen retesting 160 has decreased, and the pair is more likely to stay near the lower end of the 155-160 range,” he said.
The backdrop of heightened financial market volatility risk around the BOJ meeting is also underscored by U.S. Treasury Secretary Scott Bessent's increasingly public pressure on Japan to raise rates. If the BOJ fails to answer Bessent's thinly veiled call for tightening, it would not only catch traders off guard but could also trigger a sharp decline in the yen. Adding to the complexity, BOJ board member Takata strengthened investor speculation on Thursday that the central bank could act more aggressively than initially anticipated. He noted that a 25-basis-point hike is “not a done deal,” emphasizing that consecutive increases remain a possibility in general.
Swap markets have already almost fully priced in a 25-basis-point hike at this month's BOJ meeting, while also factoring in roughly a 75% probability of another increase in December. That suggests investors expect the pace of monetary tightening to be faster than previously envisioned. Going forward, markets are likely to remain extremely vigilant for any signs of official yen-buying intervention, as well as for the finance ministry's rate checks—a step often seen as a precursor to actual market action. Bart Wakabayashi, branch manager at State Street Trust and Banking in Tokyo, captured the prevailing mood: “Every time the exchange rate moves sharply, the first reaction on any trading desk is: 'Is this intervention?' As we saw last night, I believe the market will remain highly sensitive and on edge.”