The yen continued to strengthen on Tuesday, extending a sharp rally and reaching levels not seen in seven months as market participants increased bets that the Bank of Japan (BOJ) will tighten policy later this month. By 02:50 GMT the USD/JPY rate had fallen 0.8% to 153.18 yen after dropping as low as 152.87 earlier in the session - its weakest reading since Feb. 18.
Moves earlier in the week have already been significant: the pair declined 1.2% in the previous trading session and has weakened almost 4% from around 160 yen at the start of last week as traders covered short-yen positions and dismantled carry trades that relied on cheap yen funding to buy higher-yielding assets overseas.
Market pricing has shifted markedly toward a BOJ rate increase at the central bank's Sept. 17-18 meeting. Two pieces of domestic economic data reinforced that view: Japan's second-quarter gross domestic product was revised up to an annualised 1.4% from an initial 1.1% estimate, and real wages rose 2.4% in July. In addition, business spending was reported to have fallen by less than previously estimated, providing further evidence that the economy may be able to tolerate higher borrowing costs.
Traders are now assigning near-full probability to a 25-basis-point BOJ increase, taking the policy rate to about 1.25%. The hawkish shift in expectations received further verbal backing from Takuji Aida, an economic adviser to Prime Minister Sanae Takaichi, who forecast a September hike and anticipated additional rate rises thereafter.
At the same time, Japanese authorities signaled a desire to keep foreign exchange markets orderly. Finance Minister Satsuki Katayama said on Tuesday that Tokyo would seek to maintain orderly conditions and that Japan and the United States remained aligned on currency policy, maintaining close communication to manage exchange-rate movements. Katayama added that this stance was unchanged following coordinated intervention in July and after her recent discussions with U.S. Treasury Secretary Scott Bessent.
Market forces behind the yen's advance include expectations that Japanese investors may repatriate funds held overseas and a broader unwinding of carry trades that have been funded in the low-yielding yen. Those flows have amplified the currency's appreciation as positions adjusted.
The dollar remained under pressure ahead of U.S. consumer price data due later in the week. Observers noted that developments outside Japan could complicate central bank decisions: higher oil prices and renewed tensions in the Middle East may add to inflationary pressures. Brent crude was trading above $97 a barrel on Tuesday after Iran threatened retaliation against U.S. energy interests in the Gulf, a dynamic that could influence inflation outlooks and thereby affect policy choices at major central banks.
Summary
The yen climbed to a seven-month high after data revisions and wage growth strengthened market expectations for a BOJ rate increase at the Sept. 17-18 meeting. Officials emphasized maintaining orderly FX markets while investors trim yen shorts and repatriate assets, and external risks such as higher oil prices and Middle East tensions complicate the outlook for global inflation and monetary policy.
Key points
- Markets have priced a near-certain 25-basis-point BOJ rate hike at the Sept. 17-18 meeting, with the implied policy rate moving to about 1.25%.
- Japan's Q2 GDP was revised up to an annualised 1.4% from 1.1%, and real wages rose 2.4% in July, supporting the case for tighter policy; business spending fell by less than previously reported.
- Officials, including Finance Minister Satsuki Katayama, stressed coordinated communication with the U.S. to keep foreign exchange markets orderly after July intervention; flows such as repatriation and unwind of carry trades are boosting the yen.
Risks and uncertainties
- Higher oil prices and renewed Middle East tensions could elevate inflationary pressures, complicating policy decisions for both the BOJ and other central banks - this affects energy and inflation-sensitive sectors.
- Potential market intervention or coordinated action to manage currency volatility could alter exchange-rate dynamics suddenly, impacting exporters, importers and cross-border investment flows.
- Incoming U.S. consumer price data later in the week could further pressure the dollar and shift short-term FX positioning, with knock-on effects for global asset allocation and carry trades.