Yen rebounds on US pressure to correct weakness, with 152 per dollar in sight

The yen-dollar exchange rate, which had surged to around 164 yen per dollar, has retreated to the mid-150s, fueling speculation that the prolonged period of yen weakness may be reaching a turning point. A combination of US pressure to correct the yen's depreciation, large-scale Japanese currency intervention, and growing expectations of consecutive Bank of Japan rate hikes has prompted investors to pare back yen short positions. Some market participants now see the yen strengthening to around 152 per dollar.

The yen-dollar rate opened Monday at around 156.2 per dollar in Tokyo foreign exchange trading, down 0.08 yen from Friday's close, and was trading at around 155.88 per dollar as of 10 a.m., according to the Nikkei. The rate had stood in the low 160s per dollar on Wednesday before falling more than 5 yen.

Underpinning the yen's recovery is market confidence that both the United States and Japan will move actively to correct the currency's undervaluation. US Treasury Secretary Scott Bessent, speaking at a G20 finance ministers' meeting earlier this month, suggested the yen was undervalued and appeared to press Japan to raise its benchmark interest rate.

The yen's resilience has drawn particular attention given that August US nonfarm payrolls came in above market expectations, a development that would normally strengthen the dollar. The Nikkei noted that financial markets are beginning to factor in the possibility of a lasting shift away from the prolonged yen-weakness trend.

An official at Mitsubishi UFJ Trust and Banking said market sentiment is shifting toward reducing yen short positions, with participants concluding it is better to cut their exposure after both countries signaled their intent to address the yen's weakness.

Large-scale Japanese government currency intervention has also supported the yen's rebound. Japanese fiscal authorities purchased 11.7 trillion yen ($74.9 billion) in yen during April and May, then conducted a further 15.4 trillion yen in yen-buying and dollar-selling operations in late July and early August in a joint intervention with the United States.

The massive scale of the intervention pushed Japan's foreign currency reserves down 6.18 percent from the previous month to approximately $1.21 trillion at the end of last month — the largest monthly decline on record.

Expectations of further Bank of Japan rate hikes are also cited as a factor supporting yen strength. Markets are pricing in the possibility that the central bank could raise its benchmark interest rate at consecutive meetings, including its policy-setting session Sept. 17-18 and subsequent meetings before year-end. A narrowing of the interest rate gap between the United States and Japan would reduce the appeal of yen carry trades, in which investors borrow in low-rate yen to invest in higher-yielding overseas assets.

The yen carry trade is a strategy in which investors borrow in low-interest-rate yen and deploy the funds into relatively higher-yielding assets such as foreign bonds, currencies and shares. When the yen appreciates, the cost of repaying yen-denominated borrowings rises, giving investors a stronger incentive to unwind their positions.

According to the US Commodity Futures Trading Commission, global hedge funds' net short positions in yen against the dollar jumped 33 percent from the previous week to around 1.2 trillion yen early this month, before the yen's sharp appreciation. If large-scale unwinding of those short positions accelerates, additional yen buying and dollar selling could push the yen-dollar rate down further.

A Japanese banking industry official said the yen could strengthen to around 152 per dollar if US inflation data comes in soft and the Federal Reserve holds its benchmark interest rate steady at its FOMC meeting.

Whether the yen's recent gains represent a temporary rebound or the start of a sustained reversal of the long-running weakness trend may hinge on the US August consumer price index data due Friday. The inflation reading is expected to shape market expectations for the US rate path and the interest rate differential between the two countries.