Yen Holds Near 7-Month High

The Japanese yen eased toward 154 per dollar on Monday but remained close to its highest levels since February, supported by expectations for more aggressive policy tightening by the Bank of Japan, the unwinding of carry trades and signs of increased asset repatriation by domestic investors. The BOJ is widely expected to raise its policy rate to 1.25% on Friday, its highest level since April 1995, as the central bank addresses persistent upside risks to prices. Markets are also watching for BOJ guidance on the possibility of another rate hike later this year. Meanwhile, US Treasury Secretary Scott Bessent has repeatedly urged the BOJ to pursue more aggressive policy tightening to prevent excessive yen weakness. Investors also monitored developments in the Middle East as oil prices surged again following Saudi Arabia’s shutdown of the critical East-West pipeline, which bypasses the Strait of Hormuz.

The Japanese yen weakened past 154 per dollar on Friday, retreating from near seven-month highs as the dollar recovered after data showed US producer inflation accelerated in August, bolstering bets for a Federal Reserve rate hike next week. The yen also faced pressure from surging oil prices that kept inflation risks elevated, with the US and Iran showing no signs of backing down from the war. Meanwhile, data showed Japanese producer inflation climbed 7.6% in August, reinforcing expectations for a Bank of Japan rate increase this month. Sentiment among large manufacturers also improved sharply in Q3, reaching its strongest level since Q4 2021 amid robust government support measures. Still, the yen remained up more than 3% so far this month, supported by expectations for more aggressive BOJ policy tightening, the unwinding of carry trades and increased capital repatriation.

The Japanese yen traded around 153.4 per dollar on Thursday, remaining close to its strongest level in seven months ahead of an expected Bank of Japan rate hike next week. The central bank is widely expected to lift its policy rate to 1.25%, its highest level in roughly 31 years, following a rate increase in June. The BOJ aims to address the risk of inflation exceeding expectations amid rising crude oil prices and continued yen weakness. The Takaichi administration has also taken a more hawkish stance, with policymakers recognizing the need to curb excessive yen depreciation. Meanwhile, US Treasury Secretary Scott Bessent cautioned traders against betting on a weaker yen earlier this week, saying he has “pretty good insight” into the BOJ’s actions when making a call and intervening in the currency market. The yen has also benefited from the unwinding of carry trades and expectations of greater capital repatriation.