The yen has reversed course, and expectations of a BOJ rate hike and capital inflows, in addition to developments in the Japan-US interest-rate differential, are increasing pressure on carry trades. By the September weekend, the yen had risen against the US dollar, and market sentiment had also shifted from selling to buying.
Since the coordinated intervention by Japan and the US at the end of July, the yen has recorded one of its largest weekly gains, rising approximately 2% against the US dollar. The market sees expectations of BOJ monetary tightening and capital inflows as factors behind the yen's appreciation, driving up carry trades.
Market data indicates that views on the yen are gradually shifting from bearish to bullish. Data from Citigroup and aggregated interbank fund flows show that leveraged funds and large institutions were net buyers of the yen over the past week. The probability priced in for the BOJ to raise rates at its September policy meeting is 97%.
The FRB's policy outlook is also becoming more complex. August employment data was strong, but the unemployment rate was flat, and the probability of an FRB rate hike in September has been raised to approximately 60%. The yen's appreciation reflects not only a shift in the FRB's tightening stance but also factors beyond the narrowing interest-rate differential.
Carry trades face new risks. While expectations of a BOJ rate hike and signs of repatriation are spreading, a reduction in yen-denominated borrowing positions could affect the yen exchange rate. Experts say the risk of unwinding yen-denominated carry trades is increasing.