Japanese Yen hits six-and-a-half-month high on hawkish BoJ bets

USD/JPY extends its steep decline on Monday as the Japanese Yen (JPY) rallies against the US Dollar (USD), supported by hawkish Bank of Japan (BoJ) expectations, capital repatriation and the unwinding of Yen-funded carry trades.

At the time of writing, the pair trades around 154.42, down more than 1% on the day at its lowest level since February. Thin trading conditions due to the US Labor Day holiday may also be amplifying the move, with US stock and bond markets closed on Monday.

Markets have fully priced in a 25-basis-point (bps) interest rate increase to 1.25% at the BoJ’s September 17-18 meeting. Expectations that the central bank could tighten policy at a faster pace also support the Yen amid persistent inflation concerns.

Strategists at OCBC remain “tactically constructive on JPY” in the near term, but caution that with “a Sept BoJ hike now largely priced,” further gains will increasingly hinge on “whether expectations shift towards a faster subsequent pace of normalisation and whether the recent repatriation chatter translates into more visible flows.”

Speculation over another currency intervention has also resurfaced following the Yen’s sharp moves in recent days. Japan spent ¥15.4 trillion, around $98.66 billion, supporting the currency between July 30 and August 26, marking its largest intervention operation on record for a single month, Ministry of Finance (MoF) data showed, according to Reuters.

Meanwhile, the US Dollar struggles to benefit from rising Federal Reserve (Fed) rate hike expectations. Friday’s employment report showed that Nonfarm Payrolls (NFP) increased by 162K in August, well above the market forecast of 56K, while the Unemployment Rate held steady at 4.1%. Traders currently price in around a 58% chance of a Fed rate increase at the September 15-16 meeting.

Attention now turns to US inflation data for more clues about the Fed’s next move. The Producer Price Index (PPI) is due on Thursday, followed by the Consumer Price Index (CPI) on Friday. Hotter inflation readings could revive demand for the US Dollar and slow the decline in USD/JPY, while softer figures may add to selling pressure.