Yen hits seven-month high on bets of two BOJ hikes

The yen touched 152.89 per dollar in Asian trading, its strongest level since February, extending a nearly 5% rally as traders unwound carry trades on bets the Bank of Japan will tighten twice more this year.

"It seems like a continuation of what we saw last week, which was a powerful short squeeze," said Marc Chandler, chief market strategist at Bannockburn Global Forex. "There still doesn't seem to be much of a sign of official intervention. It seems more to be market adjustments as the yen has been used as a funding currency for carry trades. So there's just a big unwind of that."

The currency later gave up some gains and was last down 0.06% at 154.25 per dollar. The euro traded near a nine-month low against the yen at 179.33 per euro, while the dollar index slipped 0.3% to 98.84. U.S. 10-year Treasury yields climbed just over 1 basis point to 4.798%.

Traders widely expect the BOJ to raise its policy rate by 25 basis points to 1.25% at its Sept. 17-18 meeting, with a second hike priced before the end of the year. A faster tightening path would lift the rate to 1.50% from the current 1.00% and could force a broader unwind of carry trades funded in the currency, sending volatility through global equity and bond markets.

Dominic Bunning, head of G10 FX strategy at Nomura in London, said the move looked market-driven, with investors starting to think about the BOJ turning more hawkish at its next meeting. "But it's going to be quite challenging for the BOJ to hike faster than the market has priced in or to a higher terminal rate," he said. "If a weaker yen was at least part of their thinking from an inflation perspective, that's obviously becoming less of an issue."

The yen's surge to 152.89 surpassed levels reached during Japan's July intervention, when authorities stepped in to support the currency. Japanese Finance Minister Satsuki Katayama said Tokyo and Washington remain aligned in their approach to currency markets and will keep close communication to ensure orderly foreign exchange movements.

The last violent unwind of yen carry trades came in August 2024, when a surprise BOJ hike and weak U.S. jobs data sent Japan's Nikkei 225 down more than 12% in a single session and triggered a global equity selloff. That episode shows how quickly positioning built on cheap yen can reverse when the funding cost rises, and why investors are watching the BOJ's path so closely this time.

The dollar's broader weakness has compounded the yen's gains. Traders price a roughly 60% chance the Federal Reserve raises rates at its Sept. 15-16 meeting after Friday's stronger-than-expected nonfarm payrolls report, while a renewed rise in oil prices — Brent crude traded near $98 a barrel after Houthi attacks on Saudi energy facilities — kept investors cautious ahead of U.S. consumer and producer price data this week.

For global markets, the stakes are the yen's role as the world's favored funding currency. Two BOJ hikes by year-end would widen the cost of borrowing yen to fund higher-yielding assets elsewhere, and the resulting repatriation of overseas funds could pressure foreign equities and bonds held by Japanese investors. A stronger currency also cuts into the competitiveness of Japanese exporters, whose earnings translate back into fewer yen. If the BOJ delivers only one hike or signals a pause, the short squeeze could fade as quickly as it built.

This article is for informational purposes only and does not constitute investment advice.