TradingKey - On Tuesday, the yen extended its strong rally, as USD/JPY (USDJPY) dipped to 152.89 at one point, hitting its lowest level since February. As of press time, the pair was down about 0.69% to 153.27. Since retreating from a high near 160 early last week, its cumulative decline has approached 4%, indicating that investors are trimming yen shorts and carry trade positions.
Source: TradingView
The primary driver behind the yen's current rally is the market rapidly raising bets on a September rate hike by the Bank of Japan.
Currently, traders are almost fully pricing in a 25-basis-point rate hike by the Bank of Japan at its September 17–18 meeting, which would raise the policy rate to 1.25%. Recent hawkish comments from BOJ officials, along with public forecasts of a September rate hike by Takuji Aida, economic advisor to Japanese Prime Minister Sanae Takaichi, have further reinforced this expectation.
Recent economic data has also provided further support for a rate hike. Japan's annualized second-quarter GDP growth was revised up from an initial reading of 1.1% to 1.4%, with corporate capital expenditure performing better than previously estimated. In July, real wages grew 2.4% year-over-year, marking the largest increase since May 2021.
Shifting expectations regarding US and Japanese monetary policies are also driving the yen's appreciation. Investors expect the Bank of Japan to continue tightening policy, while the Federal Reserve's future path remains divided. With upcoming US inflation data, some capital is choosing to reduce long US dollar exposure. Meanwhile, Japanese investors may be repatriating a portion of overseas capital, further accelerating the unwinding of carry trades that previously profited from US-Japan interest rate differentials.
Japanese Finance Minister Satsuki Katayama stated that Japan will continue to maintain communication with the US Department of the Treasury to ensure the orderly operation of the foreign exchange market. The US and Japan had previously jointly intervened in the forex market to curb excessive yen depreciation; now, even as the yen turns to a rapid rise, the market remains vigilant about potential official action against abnormal volatility.
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