Evidence points towards the Bank of Japan

The yen's sudden surge over the past two sessions has inevitably revived speculation that Japanese authorities are back in the foreign-exchange market. For now, however, the evidence points elsewhere. The more important story appears to be a sharp reassessment of how quickly the Bank of Japan may raise interest rates.

USDJPY fell to around ¥155.84 on Thursday, leaving the yen more than 2% stronger over two sessions and at its strongest level against the dollar in roughly a month. The speed of the move was enough to put traders on intervention alert, particularly after Japan and the US jointly supported the yen at the end of July. Yet Bank of Japan account data do not suggest another large operation took place on Wednesday. The BOJ projected that fiscal factors would reduce its current-account balance by around ¥410 billion, compared with a decline of roughly ¥700 billion estimated by money-market brokers. The discrepancy is well below the ¥729 billion size of Japan's smallest intervention since 2022. A small operation cannot be completely excluded, but the numbers provide little evidence of another major bout of yen buying.

Instead, traders are rapidly repricing monetary policy. BOJ board member Hajime Takata has argued that rate increases should be conducted more nimbly as inflation risks rise, strengthening expectations that the central bank could tighten sooner and potentially faster than previously assumed. A September increase is now almost fully priced. Some traders had even started entertaining the possibility of something larger than the usual quarter-point move.

That enthusiasm may need to be tempered. Bloomberg's latest reporting suggests policymakers currently see 25 basis points as the most likely move in September. What happens beyond this meeting is less settled, however, with officials apparently prepared to tighten more quickly if inflation warrants it. That leaves scope for disappointment if the market gets too far ahead of the central bank. Indeed, part of the yen's recent strength reflects expectations not simply for one September hike, but for a materially steeper tightening path thereafter.

Intervention risk has not disappeared

None of this means traders can dismiss intervention. Japanese authorities conducted a record ¥15.3993 trillion of foreign-exchange intervention between 30 July and 26 August, according to Ministry of Finance data, and the US participated in the July action. Tokyo and Washington have since agreed to continue coordinating over orderly currency movements. That gives intervention warnings considerably more weight than they might otherwise carry.

US Treasury Secretary Scott Bessent has also become unusually vocal. He has backed decisive Japanese monetary and market action to address yen weakness and has called on the BOJ to anchor inflation expectations. At the same time, he recently described movements around ¥160 as relatively contained rather than disorderly. That distinction is important. ¥160 may be regarded by traders as a dangerous area, but Japan has not declared it an official line in the sand. Authorities consistently focus on the speed and disorderliness of currency moves rather than defending a particular exchange rate.

Timing adds another complication. The BOJ announces its decision on 18 September, shortly before Japan's Silver Week holidays. Thin holiday trading can exaggerate currency movements, while Japan has previously used a long holiday period to intervene. Bloomberg reports that traders are already watching the calendar closely. Japan's top currency diplomat, Atsushi Mimura, has meanwhile made clear that officials remain uncomfortable with recent currency movements and are watching the market closely. He also declined to say whether authorities had conducted a rate check.

The next move in USDJPY will not be decided in Tokyo alone. US employment data, inflation and the Federal Reserve's September decision will be important in determining whether the US-Japan yield gap begins to narrow. Strong US data could revive Fed tightening expectations and put upward pressure back on USDJPY. Softer numbers would reinforce the yen without requiring another intervention.

For traders, that makes this a particularly awkward currency pair to chase. Yen bears face a more hawkish BOJ and credible intervention risk, while yen bulls risk discovering that expectations for Japanese tightening have moved faster than policymakers themselves. The intervention question may dominate the headlines, but the bigger issue now is whether the shift in interest-rate expectations proves durable.

References

• https://ca.finance.yahoo.com/
• https://www.businesstimes.com.sg/
• https://www.reuters.com/
• https://www.reuters.com/
• https://www.mof.go.jp/