In September, USD/JPY moved rapidly toward yen appreciation and dollar weakness, falling temporarily from around ¥160 per dollar to the ¥152 range. The move was driven by expectations of further BOJ rate hikes, the US Treasury's stance on correcting yen weakness, and a repatriation of GPIF funds, with the upcoming FOMC and BOJ meeting now in focus.
USD/JPY has moved rapidly toward yen appreciation since the start of September, falling temporarily from around ¥160 per dollar to the ¥152 range. The move reflects a combination of expectations of further BOJ rate hikes, US pressure to correct yen weakness, and speculation over a shift in GPIF funds, accelerating the unwinding of short-yen positions. The market's previous assumption that the US-Japan interest-rate differential would persist is also beginning to waver.
The US Treasury's reference to a stance aimed at correcting yen weakness has important implications for the market. Treasury Secretary Bessent met with the BOJ governor and, while pointing to the yen's undervaluation, indicated support for measures including the normalization of BOJ monetary policy, in light of the fact that yen weakness is contributing to inflationary pressure. This fueled expectations that the US-Japan interest-rate differential could narrow.
Comments by BOJ Board Member Takata (高田) challenged the assumptions underlying the pace of rate hikes. He suggested that the BOJ was moving toward a phase requiring nimble rate hikes, challenging the prevailing view that rates would be raised by 0.25% at intervals. Governor Ueda (植田) has said that the September meeting will assess upside risks to the economy and prices, leaving open the possibility of a rate hike in September.
Attention is also focused on the asset allocation of domestic institutional investors, including GPIF. GPIF manages approximately ¥318 trillion, and its strategic asset mix is assumed to allocate 25% each to domestic and foreign bonds and equities. However, rising yields on domestic bonds have prompted discussion of a possible repatriation of funds from overseas assets. The market is pricing this in as a factor supporting yen appreciation, on the assumption that it could prompt sales of overseas assets and yen purchases.
The focus now turns to the FOMC and the BOJ meeting. At the FOMC on 15-16 September, attention will center not only on whether rates are raised but also on the dot plot, economic projections, and Chair Kevin Warsh's assessment of inflation risks. At the BOJ meeting on 17-18 September, the focus is expected to be on the pace of rate hikes and the policy outlook rather than simply on whether an additional hike is delivered. While the market is pricing in a further rate hike in September, it is also keeping the possibility of intervention in view.