Yen Surges to 7-Month High

The Japanese yen strengthened past 154 per dollar on Tuesday, reaching its strongest level since February and reversing the bearish forces that pushed the currency to a 40-year low in July. The rally was driven by the unwinding of carry trades, expectations of capital repatriation and growing US political pressure for Japan to support the yen through tighter monetary policy. Markets now expect the Bank of Japan to raise interest rates this month, with an economic adviser to Prime Minister Sanae Takaichi saying the central bank is likely to hike rates in September and deliver another increase by January next year. The remarks highlight growing recognition within the Takaichi administration, which has previously favored a dovish approach, that further BOJ tightening may be necessary to curb excessive yen weakness. Meanwhile, data showed Japanese wages rose at their fastest pace since 1997, strengthening expectations for a more hawkish BOJ policy stance.

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.