Yen Holds Rally on Hawkish BOJ Bets

The Japanese yen traded around 156 per dollar on Monday after gaining more than 2% last week, supported by growing expectations that the Bank of Japan will raise interest rates this month. Takuji Aida, an economic adviser to Prime Minister Sanae Takaichi, said the central bank is likely to hike rates in September and deliver another increase by January next year. The comments point to a widening recognition within the Takaichi administration, which has previously taken a dovish stance, that additional BOJ hikes may be needed to stem excessive yen weakness. The currency also benefited from the unwinding of carry trades, expectations for capital repatriation and increasing political pressure from the US. Meanwhile, data showed Japan’s foreign exchange reserves dropped by a record $79.6 billion in August following Tokyo’s largest-ever yen-buying intervention, with authorities spending about $99 billion between July 30 and August 26 to contain persistent weakness in the currency.

The Japanese yen traded around 156 per dollar on Friday after surging for two consecutive sessions, putting it on track to gain about 2.5% for its strongest weekly performance since Tokyo and Washington carried out a joint yen-buying operation in late July. There is no confirmation that this week’s rally was driven by official intervention, although traders have speculated that authorities conducted a rate check, which typically precedes intervention. Markets also weighed the prospects for more aggressive interest rate hikes by the Bank of Japan this year following hawkish remarks from central bank officials and mounting pressure from the US to support the yen through tighter monetary policy. The BOJ is expected to deliver a quarter-point rate hike this month and an additional increase in December. Elsewhere, the yen also benefited from broad dollar weakness after Federal Reserve Governor Christopher Waller said he would support keeping rates steady if price pressures continue to ease.

The Japanese yen strengthened past 157 per dollar on Thursday, rallying for a second straight session as traders watched for signs of intervention while weighing prospects for more aggressive policy tightening by the Bank of Japan this year. The move began late Wednesday during New York trading, stoking speculation that authorities had conducted a rate check, which typically precedes official intervention. The yen sank to 40-year lows in late July amid wide interest rate differentials, growing fiscal concerns and elevated energy and import costs, shortly before Tokyo and Washington conducted a joint yen-buying operation. Meanwhile, BOJ board member Hajime Takata raised the possibility of outsized or back-to-back rate hikes to contain rising inflationary pressures. Governor Kazuo Ueda also said that policymakers need to pay greater attention to upside price risks when conducting monetary policy, signaling that a rate hike is likely later this month.