Expectations for faster BOJ rate hikes support the yen

As expectations for faster Bank of Japan rate hikes spread, dollar-yen fell from the ¥164 range to the ¥155 range following the late-July coordinated U.S.-Japan intervention, then resumed its weakening trend and returned to the ¥160 range by the end of August. Although the intervention had a significant impact, views were expressed that, with no major changes in U.S.-Japan fundamentals, conditions remained prone to a natural move toward a weaker yen.

The yen strengthened again in early September, reaching the ¥158 range on 2 September and ¥154.08 on 7 September, levels indicating a stronger yen than those seen after the intervention. One factor cited was a statement by U.S. Treasury Secretary Bessent supporting a Bank of Japan rate hike, which heightened expectations that the BOJ would continue raising rates toward a terminal rate of around 1.75%–2.00%.

In the short term, there have also been periods when the yen's appreciation was viewed as overheated, with indicators such as Bollinger Bands showing that the dollar was oversold. This has led to expectations of a return to yen depreciation in the ¥158 range by the end of September, while views remain cautious about a break below support levels and a longer-term trend reversal.

In U.S. markets, there have been periods when expectations for Federal Reserve rate hikes strengthened, and fed funds futures at one point priced in a more than 60% probability of a rate hike at the September FOMC meeting. Since then, markets have continued to price in multiple rate hikes by next summer, while expectations have also spread that the Bank of Japan will raise rates multiple times by next summer. With the U.S.-Japan interest-rate differential expected to remain broadly unchanged, the foreign exchange market is expected to continue to be influenced by the rate differential.