USD/JPY at crossroads: BoJ, Fed and intervention

USD/JPY faces a pivotal week

After a prolonged depreciation in the yen, which led to four-decade highs for USD/JPY, the pendulum has shifted, pushing the pair to a swift decline from its peak. Against this volatile backdrop, the pair now faces a highly consequential week, bringing to the fore its main drivers: monetary policy and FX intervention.

The Fed announces its rate decision on Wednesday September 17 as it faces mounting pressure to contain stubborn inflation. Its Japanese counterpart picks up the baton just two days later amid high expectations for a hike and a hawkish outcome. Add in fresh opportunities for authorities to intervene and the fate of the carry trade is on the line.

Bank of Japan to continue policy normalisation

The Bank of Japan has steadily and incrementally advanced its policy normalisation path since March 2024, bringing rates to around 1% ^[1] - their highest level in thirty-one years. Pressure to accelerate this process has been mounting to counter yen weakness and rising inflation, with another hike widely anticipated at the next meeting on Friday September 18. Such action would constitute a faster cadence and would likely take rates out of accommodative territory and into the lower bound of neutral.

Policymakers are resolute in preventing underlying inflation from significantly surpassing 2%, with pressures tied to high crude prices, expansive fiscal policies and the AI boom lifting corporate profits and wages. The Middle East conflict and Strait of Hormuz disruptions continue, pushing oil prices higher and sustaining inflation. The government has added another ¥3.1 trillion to an already record FY26 budget as it seeks to support households and key industries ^[2]. On the labour front, the Rengo union federation confirmed a robust 5.02% average pay increase after the spring negotiations ^[3] and real wages rose for a seventh consecutive time in July. Corporate profits soared 24.6% y/y in the second quarter, driven by the electronics and computer manufacturing sector. AI demand is also boosting exports and the broader economy, with semiconductor shipments rising 49.1% y/y in July ^[4] and GDP expanding at a solid 1.4% annualised.

The combination of persistent inflation, a strong economy and a weak yen supports the case for monetary tightening. However, the policy path ahead may be more nuanced and officials will have good reasons for maintaining a cautious stance. The yen's sharp appreciation from July's multi-decade lows introduces a dual dynamic: alleviating import cost pressures while simultaneously weighing on export-reliant industries. Domestically, private consumption flatlined in Q2 and Japan's heavy reliance on Middle East crude presents a lingering vulnerability to growth. Furthermore, higher interest rates carry acute fiscal implications, inflating debt-servicing costs for a sovereign economy operating with a gross debt-to-GDP ratio of 204.4% according to the IMF. ^[5]

While a September rate hike is all but baked into market pricing, expectations are skewed toward a decisively hawkish signal, creating asymmetric risks of disappointment. Should the Bank of Japan stick to the baseline expectation of a 25 basis point move rather than a larger increment, and at the same time maintain its typically reserved approach, markets will be left wanting.

Fed decides amid ambiguity

In his Jackson Hole debut, Chair Warsh refrained again from forward guidance but offered markets more clarity around his views on the economy and monetary stance. He was unequivocal that underlying trends in inflation have not improved and officials will have work to do unless they are convinced that prices are converging to target ^[6]. Unease with inflation is growing, with three members dissenting in favour of a hike at the July hold ^[7], while Governor Barr has more recently backed a hike should inflation fail to subside. ^[8]

Inflation is stubbornly above target as crude remains elevated and prices at the pump are holding at an average well above $4 per gallon. That, however, is only part of a broader structural friction. Shifting trade policies compound the challenge, with the US and Canada imposing counter-tariffs following the breakdown of bilateral negotiations. The AI boom powering economic activity also acts as an inflationary vector, compounding pressures alongside defence spending.

The latest inflation data, which many officials had flagged as a critical input for their September 16 rate decision, offered little sign that price pressures are abating. CPI steadied at 3.4% y/y in August with energy prices accelerating. The PPI report, viewed as a leading indicator for CPI, painted a more concerning picture with a jump of 5.4% y/y. Besides energy-related costs, electronic components and accessories were up 27.6%, driven by the physical AI buildout, and government defence purchases rose 9% amid a ballooning security budget. ^[9]

Many Fed officials have viewed the impact of the energy shock on inflation as temporary, but this look-through stance may be untenable in light of the latest readings. Markets reacted immediately by boosting rate hike bets and inaction could hurt the Fed's credibility. CME priced in a September hike at 83.4% right after the CPI print, while assigning the highest probability of 48.9% to another move by year end. ^[10]

Yet it remains far from certain whether these prints will convince all committee members of the necessity for immediate action. Headline inflation did not accelerate on an annual basis and core CPI actually inched lower. Even if a majority for a hike is reached, a more unified stance on the path ahead may remain elusive. The last dot plot exposed this rift, with only half of officials expecting higher rates this year, so markets will be watching the updated projections closely. This underlying ambiguity, compounded by Chair Warsh's deliberate avoidance of forward guidance, could sustain institutional uncertainty and stoke market volatility.

FX intervention: an active tactical tool

The recent decline of USD/JPY is partly a result of FX intervention by Japanese authorities to mitigate excessive yen weakness. They have confirmed cumulative operations of over ¥27 trillion for that purpose this year across two distinct periods ^[11],^[12]. The most recent and largest campaign of ¥15,399.3 billion was deployed from late July to late August, with subsequent price action raising speculation of additional moves.

That last confirmed period marked a clear step-up in the effort to support the yen, including a rare coordinated intervention with the United States ^[13] - the first Japan-US joint action since June 1998 and the height of the Asian financial crisis ^[14]. US Treasury Secretary Bessent has been quite vocal regarding the need for currency stabilisation and BoJ rate hikes, while just a few days ago he dared traders to bet against him and the yen. ^[15]

These developtmnets have built up some deterrence, making yen sellers think twice. The incoming Fed and BoJ meetings offer fresh opportunities for Japanese authorities to step into the FX market again. Crucially, Friday's BoJ decision is followed by the Silver Week holiday period. Typically thinner liquidity during such extended breaks can drastically amplify the impact of any intervention should officials elect to act.

However, currency operations remain a tactical instrument rather than a strategic currency driver. For durable yen appreciation the fundamentals have to shift and the monetary policy differential needs to narrow. Should the BoJ fail to offer a credible hawkish signal for a faster rate hike cadence, traders could be emboldened to rebuild yen short positions.

Moreover, appetite for further currency operations could diminish as reserve buffers are depleted, with Japan's foreign assets dropping by $79.6 billion in August^[16]. Additionally, these campaigns likely include the liquidation of US Treasuries, which could create friction and test the alignment between the two sides should they continue. Bond selling exacerbates the rise in yields, which the US Treasury is actively trying to contain as it manages the ballooning debt.

USD/JPY at technical and fundamental crossroads

After registering a new multi-decade peak in late July, a sharp ensuing decline has brought USD/JPY to a pivotal structural juncture, now face-to-face with high-stakes events. The upcoming decisions from the Federal Reserve and the Bank of Japan, arriving just two days apart, alongside lingering intervention risks, could ignite volatility and define the pair's trajectory.

Technically, the immediate bias has shifted to the downside below the EMA200, opening the door to deeper corrections beyond the 2026 low. On the flip side, the move now looks stretched, creating scope for a rebound that could reinstate bullish momentum. Either move, however, would require a fundamental catalyst.

Chart source: www.tradingview.com

The BoJ is widely expected to act, but given aggressive market pricing, a standard hike alone will not be enough to satisfy markets. Policymakers will need to signal a clear intent for a higher frequency or greater magnitude of future rate adjustments, an outcome that is far from a fait accompli. Pressing too aggressively would run counter to the BoJ's cautious, gradualist approach, particularly against an uncertain macro-geopolitical backdrop. Should the central bank fail to deliver that hawkish tone, it could fuel fresh short bets on the yen.

Furthermore, the Fed's move and USDOLLAR reaction need to be factored in. Officials may find it difficult to stay on the sidelines following recent hot inflation prints, with markets aggressively pricing in a hike. Yet such a move may not provide a sustained structural boost to the greenback. Even if the Fed acts, delivering a clear hawkish signal for the path ahead could remain elusive given Chair Warsh's preference for stripped-down communications and persistent divisions among FOMC members.

Ultimately, the repeated and forceful FX operations have helped catalyse the recent decline, but continuation or reversal will need to be backed by monetary policy. Even if the BoJ holds and the Fed hikes, the rate differential will remain sizeable and unfavourable for the yen, so guidance will be a key arbiter. If policy intentions do not become clear, the pair could enter a consolidation phase.