Yen's 3.3% surge to six-month high may extend on BoJ bets

The yen's 3.3 percent surge to a six-month high rests on carry-trade unwinding, record U.S. Treasury selling and near-certain Bank of Japan rate-hike bets that analysts warn could reverse on a buy-the-rumor pullback.

"The yen is expected to strengthen further, supported by widespread expectations of a BOJ rate hike and the potential for Japanese pension funds to repatriate capital into domestic assets," said Lee Hardman, senior FX analyst at Mitsubishi UFJ Financial Group.

The currency touched ¥154.04 per dollar on Sept. 7, its strongest since late February, after gaining as much as 1.4 percent in a single session. Markets price roughly a three-in-four chance the BOJ lifts its policy rate by 25 basis points to 1.25 percent at next week's meeting, and some investors now treat consecutive hikes as their base case. Japan's overseas securities holdings fell $87.8 billion in August, the largest decline on record, closely matching the ¥15.4 trillion ($98.6 billion) of currency intervention deployed over July and August, while total reserves dropped $94.6 billion to $995 billion.

The stakes extend well beyond the currency. Cross-border yen borrowing has climbed to ¥360 trillion, the largest buildup in nearly three decades, leaving leveraged investors exposed if the yen keeps climbing. A sustained rally would force funds to repay yen funding by selling global risk assets, echoing the August 2024 episode when the TOPIX fell 12 percent in one session and the S&P 500 lost 3 percent.

Rate-Hike Bets Pile Up Before BOJ Meeting

Expectations for the BOJ's path shifted sharply over the past week. U.S. Treasury Secretary Scott Bessent has said publicly that the yen's depreciation was excessive, while BOJ board member Hajime Takata said a September hike is "not necessarily a done deal" but that consecutive increases are possible. Japan's top currency official, Atsushi Mimura, said his "fighting stance" on the yen is unchanged.

The last time the BOJ raised rates, in July 2024, it lifted the policy rate to 0.25 percent and triggered a violent global unwind. That tightening cycle has since moved the rate to around 1 percent, still far below the U.S. policy rate of 3.50-3.75 percent, which keeps the carry trade profitable on paper even as the direction turns less favorable.

Analysts disagree on fair value. Because the BOJ is widely seen as behind the curve, the domestic premium puts dollar-yen fair value near 160, while pure interest-rate differentials suggest closer to 140. "If that premium narrows, yen appreciation could be very rapid," said Van Luu, global head of fixed income and FX solutions strategy at Russell Investments, who believes this may be just the beginning of a larger move.

Treasury Sales Add Pressure to U.S. Yields

The selldown in overseas securities points to Japan funding its intervention by selling U.S. Treasuries, which make up roughly 70 percent of its reserves. "The securities sold were very likely U.S. Treasuries," said Atsushi Takeda, chief economist at Itochu Research Institute, noting that 10-year Treasury prices at the end of August were only slightly below end-July levels, suggesting active selling rather than valuation changes.

That adds supply pressure to a U.S. bond market already contending with rising energy prices and a widening fiscal deficit. Maurice Obstfeld, former chief economist at the International Monetary Fund, said Japan selling Treasuries to buy yen could push U.S. long-term rates higher. The U.S. Treasury has announced it will double its long-term bond buyback program over the two months through Nov. 4 to push down yields, a direction Japanese selling would work against.

Not everyone is convinced the rally holds. Marc Chandler, currency strategist at Bannockburn Capital Markets, said the market has fully priced this month's hike, and an actual increase could produce a "buy the rumor, sell the fact" move, similar to the New Zealand dollar's retreat after the Reserve Bank of New Zealand raised rates. Following the joint Japan-U.S. intervention in late July, the yen strengthened initially but later gave back gains, showing intervention support is not permanent.

The BOJ's policy decision next week, and whether it signals another hike before year-end, will determine whether the yen's six-month high marks the start of sustained appreciation or a spike that fades once the rate increase lands.

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