The Japanese yen held near 156 per dollar on Monday, keeping most of last week's 2 percent gain as markets priced a quarter-point Bank of Japan hike for the September 17-18 meeting and traders unwound carry trades across Asia.
Takuji Aida, an economic adviser to Prime Minister Sanae Takaichi, said the central bank is likely to raise rates in September and deliver another increase by January, according to Trading Economics. The comments matter because the Takaichi administration previously leaned dovish. A government adviser backing consecutive hikes points to a widening recognition inside the ruling camp that extra tightening may be needed to stop the yen from weakening further, under pressure from Washington and from import costs.
Rate futures put the chance of a September 18 hike at about 75 percent, with a 60 percent probability of a follow-up move by December, Reuters reported. Bloomberg reported over the weekend that board members are considering raising the policy rate to 1.25 percent, which would be the highest in decades for Japan and a faster path than most officials had signaled earlier this year.
| Level | Reading | Note |
|---|---|---|
| USD/JPY | About 156.11 | Lost 2.4% last week, support at 155.00 |
| EUR/JPY | About 179.45 | Fell more than 1% Monday |
| September hike odds | 75% | 60% priced for a second move by December |
| FX reserves drop, August | $79.6 billion | Record, after record intervention |
Carry trades keep unwinding
The yen's rise forced leveraged investors out of positions built on cheap Japanese borrowing. The Australian dollar fell through 112.7 against the yen, a level analysts at FXStreet flag as carry-trade stress, and the pound sank to a six-month low against the currency on Monday. The euro lost more than 1 percent to trade near 179.45. Each unwinding leg feeds the yen higher, because closing a carry trade means buying yen to repay the loan.
The dollar tested major support at 155 after dropping from the 160 area in two sessions last week. A break of 155.21 would open the way toward 153, levels last seen when Tokyo and Washington conducted a joint yen-buying operation in late July.
The intervention bill comes due
Finance ministry data showed Japan's foreign exchange reserves fell a record $79.6 billion in August. Authorities spent about $99 billion buying yen between July 30 and August 26, the largest intervention on record, and the reserves line shows the cost of that operation. No one has confirmed official involvement in this week's rally, though traders suspect authorities ran a rate check, the step that usually precedes intervention. If fundamentals are now doing the work intervention started, the ministry gets a breather it has not had since spring.
The shift also changes the political economy of Japanese monetary policy. A government that once criticized hikes now has its own adviser endorsing them, and American officials have pressed Tokyo to support the currency through tighter policy rather than through currency market operations alone.
Tightening is spreading, not retreating
Japan sits inside a broader repricing. Strong US payrolls left markets pricing a 58 percent chance the Federal Reserve raises rates at its September 16 meeting and 70 percent for October. The ECB meets Thursday with inflation at 3.3 percent and a 96 percent chance of a 25 basis point hike. Brent crude near $97 keeps energy-driven inflation pressure on every board. Bond markets moved first: 10-year Treasury yields sit near 4.78 percent, the highest since late 2023, and German yields reached levels unseen since 2011.
For the yen, the calculation is straightforward. If the Bank of Japan delivers on September 18 while the Fed stays on hold a day later, the rate gap narrows for the first time in the cycle and the yen has room to extend its gains. If the Fed surprises with a hike of its own, the rally pauses. Gold slipped 0.5 percent to about $4,406 an ounce on Monday, a small signal that the dollar is not the only safe haven attracting flows this week.
Traders now watch the September 18 decision, the preceding national CPI print, and the 155 line on the dollar. A delivered hike with hawkish guidance would mark the third Japanese increase of the cycle and the first with explicit government backing.
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