The yen is vulnerable to sharp moves and further declines over the next week, with a three-day holiday in Japan set to reduce trading liquidity and investors disappointed that the central bank didn’t offer stronger guidance on the pace of future interest rate hikes.
The yen steadied around 156.86 per dollar Monday after falling as much as 1.3% Friday, when two Bank of Japan board members dissented from a rate hike. A later report that officials had called market participants for a rate check, a prelude to potential currency purchases, only pared losses. The yen fell more than 2% last week, its biggest weekly decline in almost a year.
“Like most other times the yen has gone into a BOJ meeting on the front foot lately, the BOJ has stopped it dead in its tracks,” James Reilly, senior markets economist at Capital Economics, wrote in a note. “It seems fair to say that a material upturn in the yen’s fortunes vis-á-vis the US dollar will depend on the US side.”
The reported rate check also highlights the risk that authorities come back into the market to arrest further weakness in the yen, which would bring rapid price swings that can burn traders. The thinner liquidity expected because of holidays in Japan through Wednesday presents an opportunity to amplify the impact of any official intervention. A similar window around the Golden Week holiday from late April to early May saw Japan stepping in after the currency weakened beyond 160.
The most recent round of yen intervention, which began in late July when the US entered the market alongside Japan, bolstered the currency by more than 6%. While the rally peaked at 152.89 on Sept. 8, some investors were still relatively optimistic about the yen until last week.
“We were wondering if USD/JPY is on the cusp of change,” Joey Chew, head of Asia foreign exchange research at HSBC Holdings Plc, said in a note. “We now assess that recent events can only stabilize USD/JPY rather than trigger a downtrend.”
Governor Kazuo Ueda sent mixed signals on the path for future hikes following the BOJ’s increase on Friday. He indicated hawkishness by noting that the stage for policy setting had shifted, but he also said it was difficult to determine the terminal rate for the current tightening cycle and gave little away on the pace of future hikes.
Swaps markets have a hike less than 20% priced in for the next policy meeting at the end of October. An increase is almost 90% priced in for the December policy decision.
The yen’s rally at the start of this month had been fueled by expectations of faster BOJ tightening, an unwind of yen-funded carry trades and speculation that Japanese pension funds could shift more money to domestic assets. But the Federal Reserve’s hike this week and Ueda’s messaging have some strategists warning the dollar-yen rate may keep climbing if investors conclude the Japanese central bank will struggle to keep pace with the Fed’s tightening.
“Looking ahead, we think the external backdrop remains a headwind for JPY,” Morgan Stanley MUFG Securities strategists Koichi Sugisaki and Hiromu Uezato said in a note.
The yen slumped to about 164 per dollar in July, its weakest in four decades. The slide set the stage for the coordinated US-Japan yen-buying operation, the first since 1998, which raised the stakes for traders betting against the currency.
Japan spent a record ¥15.4 trillion on intervention in the month through Aug. 26, according to Finance Ministry data. US Treasury Secretary Scott Bessent has since continued to signal support for a stronger yen.
Separately, hedge funds turned positive on the yen for the first time since July 2025 in the week ended Sept. 15, a noteworthy shift in sentiment after the intervention. The pivot to bullishness risks catching traders wrongfooted after the BOJ disappointed some market participants who’d hoped for more hawkishness.
With assistance from Kana Nishizawa, Aya Wagatsuma, Kentaro Tsutsumi and Toby Alder.
This article was generated from an automated news agency feed without modifications to text.
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