Yen hits highest since February as BOJ rate bets rise

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Yen hits highest

Highlights

The yen strengthened as much as 1.4% to 154.06 per dollar.
BOJ rate-hike expectations are supporting the rebound.
Japan has spent about ¥27.1 trillion on intervention this year.

The yen strengthened as much as 1.4% to 154.06 per dollar after weakening to 160.39 last week. The move through 155 accelerated demand for the Japanese currency, a level closely watched after previous intervention episodes, according to Bloomberg.

Rate expectations reshape yen outlook

The latest advance marks a significant shift in sentiment after investors spent weeks questioning whether currency intervention could produce lasting gains. Expectations that the Bank of Japan could raise interest rates have increasingly replaced direct intervention as a source of support for the yen.

Speculation that the Japan Government Pension Investment Fund could adjust its asset allocation has added another potential source of demand. Portfolio rebalancing at the start of September also appears to have contributed to the move.

The break below 155 was particularly important for the yen, as the level had previously provided support for the dollar. Once it gave way, stop-loss activity and options positioning helped accelerate the yen advance in relatively thin markets.

Options markets are signaling that investors expect larger currency swings around upcoming meetings of the BOJ and Federal Reserve. Measures of volatility covering those decisions climbed Friday to their highest since January, while demand for protection against further yen appreciation remained elevated.

Intervention leaves a visible mark

The rally follows extraordinary efforts by Tokyo to stabilize its currency. Japan conducted an intervention totaling roughly ¥11.73 trillion in April and May, followed by another ¥15.4 trillion operation in late July, when the U.S. also participated in coordinated action.

A combined intervention of about ¥27.1 trillion, or roughly $175 billion, is the largest annual amount on record, exceeding the ¥20.4 trillion deployed in 2003. The coordinated operation with Washington was the first by the two countries to support the yen since 1998.

Those actions have also affected Japan's foreign reserves. Reserves fell 6.18% in August to $1.207 trillion from $1.287 trillion in July, the fourth consecutive monthly decline and the steepest percentage drop since comparable ministry records began in 2000.

A stronger yen changes the market equation

The latest move matters because the yen is now gaining support from more than official intervention. A shift in BOJ expectations, portfolio flows, and technical positioning could make the appreciation more durable if Japanese monetary policy continues moving away from years of ultra-low rates.

For global markets, sustained yen strength can also pressure popular carry trades financed with cheap Japanese currency. After reaching a 40-year low of 163.98 per dollar on July 23, the move toward 154 represents a substantial reversal and raises the possibility of further volatility around the next BOJ and Fed decisions.

As we previously reported, Japanese bond yields climb to 30-year highs as rate expectations rise.

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