Yen hits six-month high near 154 on BOJ hike bets

The yen strengthened to its strongest level since late February, extending a rebound built on expectations that the Bank of Japan will raise rates this month while the Federal Reserve leans toward skipping a September increase. The currency's U-turn has gathered pace as the two central banks' paths converge, compressing the interest-rate gap that had long made the yen a favored funding leg of the carry trade.

"Now that it's clear that the BOJ will continue hiking, the yen is fashionable again," said Stefan Angrick, senior economist at Moody's Analytics.

The dollar was last 1.2 percent lower at 154.38 yen after touching 154.04 earlier in holiday-thinned Asian trade. The move marks a sharp reversal for a currency that had been sold heavily on the wide spread between U.S. and Japanese rates, which encouraged traders to borrow cheap yen and invest in higher-yielding assets elsewhere.

What happens next hinges on two events this week: a speech from a BOJ board member on Thursday and U.S. inflation data, either of which could extend or stall the yen's momentum. Barclays economists cautioned that the latest rally has raised the bar for further appreciation, with the next big move hinging on the BOJ delivering on its perceived hawkish signals.

The market consensus already favored BOJ tightening this month even before the yen began rebounding, and recent hawkish comments from officials have led a minority of investors to price in the chance of faster and larger moves. Some talk of a 50-basis-point increase has surfaced, though Angrick dismissed that as overdone, saying the BOJ is likely concerned about "potentially throwing the baby out with the bathwater" — tightening too much, too quickly and tipping the economy into recession.

On the U.S. side, investors have repriced the Fed's path after hawkish comments from Chairman Kevin Warsh were followed by more dovish remarks from Governor Christopher Waller. Nomura analyst Naka Matsuzawa expected the yen to gain further this week as the Fed leans toward skipping a September increase and the case for a BOJ hike strengthens.

The narrowing of the U.S.-Japan rate differential is unwinding the carry trade that had depressed the yen, and the currency has become more attractive after being oversold relative to economic fundamentals and rate spreads for some time, Angrick said. He questioned why investors were only now changing their view. "I'd really like to ask the people who are changing their view now, what have you been doing the last two years?" he said.

The yen's sharp moves on Monday may also rekindle chatter about potential intervention by Japanese authorities, who have in the past taken advantage of thinned liquidity during public holidays to step into the market. A stronger yen carries broad implications beyond the currency pair, pressuring the earnings outlook for Japanese exporters whose competitiveness depends on a weaker exchange rate, even as it eases imported inflation for households and businesses.

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