This time, the fingerprints are harder to find.
Tide Turning?
For most of this year, every decent yen rally has arrived with the same question hanging over it: where is the Ministry of Finance?
This time, the fingerprints are harder to find.
has dropped sharply back toward 155.00, a level that has already acted as a stubborn seawall after the intervention-driven yen rallies in late April, early May and again through late July and early August. But the latest BoJ current account data showed no obvious sign that Tokyo has been leaning heavily on the market.
That makes this move more interesting.
The yen is not simply being dragged higher by the threat of intervention. It is finally getting some fundamental wind at its back.
The biggest change is coming from the Bank of Japan. Markets are increasingly leaning toward a 25-basis-point hike this month, and Governor Ueda has sounded progressively less interested in keeping policy nailed to the floor. Inflation risks remain skewed higher, service prices are still sticky and the weak yen itself continues to keep the pressure on.
Then Scott Bessent tossed another match onto the pile.
His remark that “I have information the market does not have,” followed by reports that he raised concerns with Finance Minister Katayama over fiscal policy and central bank independence at the G20 meetings, was enough to get the market wondering whether Washington is quietly pushing Tokyo toward a firmer policy stance.
And once traders start sniffing around that possibility, the yen no longer needs intervention headlines to do the heavy lifting.
Bloomberg’s reporting that the BoJ is leaning toward a 25-basis-point hike this month only added fuel. The same report cooled some of the more feverish talk of a 50-basis-point jumbo move, but that is almost beside the point. The market has already moved from asking whether the BoJ will hike to arguing over how quickly it will keep hiking.
Japanese rates have travelled a long way with it. Markets are now pricing in almost 50 basis points of cumulative tightening by year-end and a little more than 75 basis points by the middle of next year.
The carry trade is not dead, but somebody has started turning down the music.
That matters because the yen is finally being helped by its own side of the rate equation rather than merely waiting for the dollar to stumble.
There is another wrinkle too.
GPIF speculation is back on the screen after an unusual management committee meeting on August 21. The agenda reportedly included operational matters related to asset allocation, which was enough to spark talk that some of Japan’s enormous overseas allocation could eventually drift home.
Nobody is ringing the repatriation bell yet.
But in a market that has spent years treating Japanese capital outflows as part of the furniture, even the suggestion that the flow could become less one-way is enough to make traders sit up.
The fiscal side remains the splinter under the fingernail. Japanese ministries have requested around JPY143.1 trillion in spending for the coming fiscal year, comfortably above last year’s initial requests, and that keeps the Takaichi fiscal story alive in the background.
Still, the immediate FX arithmetic is moving the yen’s way because the dollar side of the equation is softening at the same time.
Fed hike expectations have been scaled back sharply over the past few days. Markets are now closer to a coin toss on whether the Fed hikes this month, down from roughly 70% earlier in the week. That has taken some heat out of US yields and allowed to crawl back toward pre-Jackson Hole levels.
John Williams called the recent inflation data encouraging and suggested some of the tariff effects are beginning to fade. Governor Waller sounded equally reluctant to rush, saying that if recent cooling continues he would be inclined to leave rates unchanged.
That pushes the real decision point toward next week’s CPI report.
Friday still matter, but unless the jobs report serves up a genuine clunker, inflation probably carries more weight for the September Fed call.
And that is what makes USD/JPY around 155 so interesting.
TESTING IMPORTANT SUPPORT LEVELS
For months, yen rallies were largely about fear of Tokyo stepping in. Now the market is starting to price something more durable: a BoJ moving tighter just as expectations begin to leak lower.
That is a very different setup.
The yen still has plenty working against it. Japan’s fiscal backdrop is messy, the dollar still carries a substantial yield advantage and traders have lost money for years trying to call the great yen reversal too early.
But this move has a different smell to it.
If USD/JPY breaks cleanly through 155 without the Ministry of Finance having to reach for the chequebook, that would be a much more meaningful signal than another intervention-driven flush.
It would suggest the tide is not just turning because Tokyo pushed it.
It may finally be turning on its own.
From Bloomberg
Carry Trade Exodus Fuels Yen Gain Ahead of BOJ Rate Decision
A rush to unwind yen-funded carry trades helped send the currency to a one-month high against the dollar as traders ramped up bets on further Bank of Japan interest-rate hikes.
The yen held most of its gains Friday after advancing more than 2% on Thursday, nearing levels last seen in May following the Ministry of Finance intervention. The move came after hawkish comments from BOJ Governor Kazuo Ueda and board member Hajime Takata. The BOJ could raise rates at three consecutive meetings through December in an extreme scenario where yen weakness persists, according to Nomura Securities Co.
“We’re seeing unwinds of yen-funded carry trades and significant interest to own the yen over other G10 currencies in the medium term,” said Sagar Sambrani, a senior foreign-exchange options trader at Nomura in London. “The broad consensus seems to be that the easy carry trade is behind us and that the size of cross-border flows from Japan to the US could have changed materially.”
The yen has long been a popular funding currency for carry trades because of Japan’s low borrowing costs. Investors borrow the yen to buy higher-yielding assets in the US, Brazil or Mexico where rates are higher, and then earn the interest rate differential. As long as the Japanese currency remains stable or weakens, they make money. If the yen strengthens, it will cost more to repay the loan, wiping out profits.
Trading in yen call options against the dollar expiring this month was more than two-and-a-half times the volume of puts on Thursday, according to Chicago Mercantile Exchange data, as traders bought calls to cover their existing short yen exposure. Calls gain in value when the Japanese currency appreciates against the greenback.
Carry trades are coming under pressure as expectations for tighter BOJ policy push Japanese yields higher, strengthening the yen and spiking volatility. 2-year yields have jumped about 14 basis points this week, while swap traders have priced in a quarter-point increase at the Sept. 18 meeting, and nearly three additional moves of the same size by July. That would mark a sharp acceleration from the average pace of two hikes a year since the start of 2024.
The dollar was not the only currency that felt the impact of the carry trade unwind yesterday. High-yielding currencies such as the , and all fell more than 1% versus the yen.
What Bloomberg Strategists Say…
“The yen’s 2% surge against the dollar is the clearest evidence yet that a more active BOJ is the best cure for a weak currency.”
Brendan Fagan, Markets Live strategist
There may be scope for further short covering. Leveraged funds held a net short yen position of 81,619 contracts in the week ended Aug. 25, while asset managers were short 18,284 contracts, according to the latest Commodity Futures Trading Commission data. Expectations that the BOJ will raise rates this month and remain flexible over the pace of further tightening have prompted investors to pare those positions.
Japanese exporters have also stepped up sales of dollars for yen, adding to the currency’s advance, according to traders. Bank of America Corp. said the currency’s rally reflected a broad shift in sentiment.
“Rather than activity from any single corner of the market, the move in dollar-yen appears to reflect a broader reallocation of risk following developments over the past 48 hours,” said Ivan Stamenovic, head of Asia-Pacific Group-of-10 currency trading at Bank of America in Hong Kong.
Still there are those who say the current trend may reverse. In the short term, at least, rapid yen strengthening and higher volatility have likely cleared some carry positions, according to Societe Generale SA.
“But the bar for the BOJ to shake up the yen-funded carry trade is likely quite high, given that they will need to deliver a significant dose of hawkishness to get yen appreciating durably,” said Galvin Chia, Hong Kong based emerging Asia strategist at the bank.
Back in London, discussions around the capitulation of yen-funded carry trades are also making their way around market participants’ desks. There’s been a notable shift in sentiment this week, which helped spur investors to unwind crowded bearish yen and positions, according to Mizuho Bank.
The “driver was the unwind of yen short position — mainly hedge fund accounts,” said Masayuki Nakajima, senior strategist at Mizuho in London. “Expectations for further BOJ tightening also strengthened.”
