Yen hits seven-month high as carry trade unwinds on BOJ rate hike bets

The Japanese yen climbed to its strongest level since February on Tuesday, touching 152.89 per dollar as investors ramped up bets that the Bank of Japan will raise interest rates at its September 17-18 meeting. The currency has gained roughly 4.5% from around 160 yen per dollar at the start of last week, making it the best-performing Group-of-10 currency this month.kelo+1

The rally accelerated after USD/JPY broke below the closely watched 155 level, triggering stop-loss orders and forcing options dealers to sell dollars, according to Reuters. The move built on a 1.2% jump during Monday's thin trading session, when U.S. markets were closed for a holiday.reuters+1

A Perfect Storm for Yen Bulls

Multiple forces are converging to drive the yen higher. Markets are now pricing a 97% probability of a 25-basis-point rate increase to 1.25% at next week's BOJ meeting, up from 52% a month ago. Japanese economic data has reinforced the case: second-quarter GDP was revised up to an annualized 1.4% from an initial 1.1% estimate, while real wages rose 2.4% in July, their strongest increase since May 2021.investing+2

"When the yen started to move stronger, I think it triggered a lot of stop losses… especially when they started to break some of those key levels," said Khoon Goh, head of Asia research at ANZ Australia and New Zealand Banking Group Limited.kelo

The surge is also unwinding the popular yen carry trade, in which investors borrow cheaply in yen to invest in higher-yielding assets elsewhere. Cross-border yen borrowing ballooned to a record 360 trillion yen ($2.35 trillion) as of March, according to a Jefferies ↘ 0.96% analysis of Bank for International Settlements data cited by Reuters. "The carry trade is vulnerable because this unwind is happening before the BOJ has even delivered its expected hike," said Charu Chanana, chief investment strategist at Saxo.reuters

What Comes Next

Japanese Finance Minister Satsuki Katayama said Tuesday that Tokyo and Washington remain aligned on currency policy and will continue working to ensure orderly foreign exchange markets. The dollar index sat subdued near 98.84 as attention turned to U.S. consumer price data due Friday — the last major release before the Federal Reserve's own September 15-16 meeting, where traders are pricing roughly a 60% chance of a rate hike.kelo+1

"The yen is at a crossroad," said Rodrigo Catril, a strategist at National Australia Bank. "A hike next week is a necessary condition, but for the yen to sustain recent gains, the BOJ will need to deliver a hawkish message and reaffirm the market's view that another hike before year end is more likely than not."moneycontrol+1

Rising oil prices — with Brent crude firmly above $97 a barrel amid Iranian threats against U.S. energy interests in the Gulf — added another layer of uncertainty for both central banks. State Street's Masahiko Loo warned that a further unwind could push USD/JPY toward the mid-140s, but cautioned: "The carry trade still works, but it is no longer a free lunch. It now comes with a political risk premium."reuters+2