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The Japanese yen surged against the dollar, surpassing 157 yen per dollar and reaching its highest level in nearly a month, after climbing from levels above 160 yen in just two trading sessions. This rise comes as markets increasingly bet that the Bank of Japan will continue raising interest rates, while simultaneously awaiting the release of the US jobs report on Friday, which could determine whether this reversal in the dollar-yen exchange rate will continue or stall.
Yen is finally finding some momentum
The USD/JPY pair fell by about 1% on Thursday, settling below 157 yen, its lowest level in nearly a month. This followed a roughly 0.9% rise in the yen on Wednesday, transforming what initially appeared to be another unsuccessful attempt to defend the 160 yen level into a more significant reversal in just two trading sessions.
The yen had recently hit its lowest level in nearly 40 years at 164 yen to the dollar , before a rare joint intervention by the United States and Japan in the currency market temporarily pushed the pair towards the 155.20 level.
But the yen later gave up a large part of these gains.
The current wave appears different; market movements indicate that this time the rally is not solely dependent on Japanese government intervention to sell dollars and buy yen, but is also receiving increasing support from shifting interest rate expectations . At the outset of the move, speculation arose that Japanese authorities might have intervened again in the market, or conducted what is known as a “rate check,” a move in which officials might request banks to provide live exchange rates, sometimes preceding actual market intervention.
But analysts have begun attributing much of the movement to more hawkish signals from the Bank of Japan. In other words, the yen appears to be moving more strongly this time , driven by real economic factors rather than just official intervention .
Bank of Japan raises its hawkish tone
One of the main drivers behind the yen’s strength is the shift in the Bank of Japan’s tone regarding interest rates. Bank of Japan board member Hajime Takata stated that interest rates should rise flexibly in response to inflation, rather than following a fixed and predictable schedule, such as raising rates twice a year. Meanwhile, Bank of Japan Governor Kazuo Ueda indicated that economic and price risks would be discussed at the September meeting.
These statements left the door open for an interest rate hike at the next meeting, rather than treating the decision as a foregone conclusion or a predetermined postponement. Indeed, markets are now pricing in a very high probability of the Bank of Japan raising interest rates in September , with expectations of a further 50 basis point tightening of monetary policy by the end of the year. One basis point equals 0.01% , so 50 basis points is equivalent to half a percentage point. These expectations have already been reflected in the Japanese bond market, with the yield on two-year government bonds rising to 1.83% on Wednesday , its highest level since 1995.
High returns threaten the carry trade.
The significance of rising Japanese interest rates extends beyond investors within Japan, impacting one of the most popular trading strategies in the currency markets: the carry trade . The concept is simple: an investor borrows money in Japanese yen, where interest rates have been exceptionally low for an extended period, and then converts these funds into other currencies or assets offering higher returns.
As long as the cost of borrowing in yen remains low, and the yen remains stable or weak, investors can profit from the difference between their return and the cost of borrowing. However, when the Bank of Japan begins raising interest rates, the cost of holding these positions increases, making the strategy less attractive. If traders start closing their carry trades, they must sell foreign assets and buy back yen to repay their borrowing, thus increasing demand for the Japanese currency .
This is where the significance of the current movement lies: if the Bank of Japan continues to raise interest rates at a faster pace, we could see a wave of position rebuilding that further supports the yen. After years in which the yen was one of the world’s most important cheap funding currencies, it appears the Japanese currency is finally starting to raise the cost of entering that game.
But the US jobs report could change the equation.
Despite the strength of the yen, another player still holds sway on the opposite side of the USD/JPY pair: the US Federal Reserve . Markets anticipate that Friday’s US jobs report will show the addition of approximately 56,000 new jobs . Meanwhile, markets are currently pricing in a near 60% probability of a US interest rate hike in September .
If the jobs data comes in weak, the likelihood of a US interest rate hike may decrease, and Treasury bond yields may fall, putting further pressure on the dollar and supporting the continued decline of the dollar/yen pair.
However, if jobs are strong, coupled with robust wage growth, Federal Reserve Chairman Kevin Warsh’s hawkish tone could gain further support. In that case, the dollar could resume its upward trend against the yen, with the pair potentially moving towards 159 and then 160 yen . The dollar/yen exchange rate has thus become an arena for the repricing of monetary policy in the two largest advanced economies. On one side, there is the Bank of Japan, which appears ready to accelerate the pace of interest rate hikes . On the other side, there is the Federal Reserve, which still retains the option of raising US interest rates again .
Important levels against the dollar and yen
With the pair falling below 157 yen, the 157 level has become a key short-term turning point. Should the dollar continue to weaken, the next support appears near 156 yen , then at 155.20 , the level the pair reached after the recent Japanese-US intervention. On the upside, resistance levels are concentrated at 159 and then 160 yen .
A break below 157.50 would be a further indication that the current move represents a genuine trend reversal, not just a temporary dollar pullback. If the dollar manages to recover to the 160 yen level, it could mean that the yen’s recovery still requires official support from Japanese authorities. The recent shift in the dollar/yen market warrants close monitoring as it may be more than just a short-term movement.
The yen, which had suffered a sharp decline to levels not seen in four decades, is now finding support from a dramatic shift in Japanese interest rate expectations. Rising Japanese bond yields, statements from Bank of Japan officials, and the likelihood of further rate hikes are all putting pressure on the carry trade and increasing demand for the yen.
But the other side of the equation has not yet been decided.
Friday’s US jobs report will be the next test. If the US economy shows signs of weakness, the yen could receive a boost, extending the dollar/yen decline towards 156 and then 155.20. Conversely, if the data is strong, the dollar could retest 159 and 160. Currently, the battle is not just between the dollar and the yen, but between two opposing monetary policies: the Bank of Japan, which is beginning to normalize its monetary policy, and the Federal Reserve, which continues to hint at the possibility of further tightening.
