Japanese yen heads for second consecutive weekly gain

The Japanese yen fell against a basket of major and minor currencies in Asian trading on Friday, extending losses against the US dollar for a second consecutive day and moving further away from a seven-month high as correction and profit-taking continued.

The decline comes as the US dollar continues to recover in the foreign exchange market, while the yield on the 10-year US Treasury note has climbed to fresh three-year highs and is moving closer to the 5% threshold for the first time since October 2023.

Despite Friday’s decline, the Japanese yen remains on track for a second consecutive weekly gain, supported by the Bank of Japan’s hawkish stance as the central bank prepares to raise interest rates for the second time this year at its meeting next week.

The Price

• The Japanese yen today: The dollar rose 0.15% against the yen to ¥154.62, from the day’s opening level of ¥154.42, after recording a low of ¥154.25.

• The yen ended Thursday down 0.6% against the dollar, its first loss in four days, as correction and profit-taking accelerated from a seven-month high of ¥152.89.

• In addition to profit-taking, the yen came under pressure after strong US economic data increased expectations that the Federal Reserve will raise interest rates in September.

US dollar

The US Dollar Index rose 0.1% on Friday, extending gains for a second consecutive session and reflecting the continued recovery of the US currency from a three-week low against a basket of global currencies.

The yield on the 10-year US Treasury note rose around 0.4% on Friday, extending gains for a fifth consecutive session and reaching a three-year high of 4.979%, boosting the attractiveness of investments in the US dollar.

The yield is moving closer to breaking above the 5% threshold for the first time since October 2023, driven by the current surge in global oil prices, which is expected to increase inflationary pressures on Federal Reserve policymakers and significantly strengthen the likelihood of further US interest rate hikes this year.

US government data released on Thursday showed that annual producer price inflation rose more than expected in August, increasing expectations of a US interest rate hike in September.

Following the data, according to the CME FedWatch Tool, the probability of the Federal Reserve leaving interest rates unchanged at its September meeting fell from 40% to 28%, while the probability of a 25-basis-point rate hike increased from 60% to 72%.

Investors are now awaiting key US inflation data later today, with the release of the August Consumer Price Index expected to trigger another repricing of those probabilities.

Weekly trading

Over the course of this week, which officially ends with today’s settlement, the Japanese yen has gained more than 1% against the US dollar so far and is on track for a second consecutive weekly gain.

Bank of Japan

According to a Reuters report citing four sources familiar with the Bank of Japan’s thinking, the central bank is preparing to raise interest rates next week, most likely by 25 basis points, and could signal a faster pace of monetary tightening in the future if price pressures increase the risk of inflation overshooting its target.

The sources said the Bank of Japan is unlikely to have a predetermined view of the terminal interest rate, as this will depend on how previous rate increases affect the economy and the extent to which companies pass higher input costs on to households.

Hawkish comments

Bank of Japan Governor Kazuo Ueda said last week that the central bank would discuss raising interest rates, including at its September meeting, with a focus on whether inflation risks are increasing.

Bank of Japan board member Hajime Takata said monetary policy should be more flexible in raising interest rates to address growing inflationary pressures rather than adhering to a fixed timetable for rate increases.

US Treasury Secretary Scott Bessent, during recent meetings on the sidelines of the G20 gathering in the United States with Japan’s finance minister and the Bank of Japan governor, called for further interest rate increases and support for the yen.

Those comments and developments have strengthened expectations that the Bank of Japan will continue normalizing monetary policy this year and raise interest rates more than once during the remainder of 2026.

Japanese interest rates

• Markets are now fully pricing in a 25-basis-point interest rate hike by the Bank of Japan at its September meeting, with the probability at 100%.

• The probability of another 25-basis-point rate hike at the Bank of Japan’s October meeting remains around 25%.

Yen carry trades

As expectations grow that the Bank of Japan will raise interest rates more than once this year, uncertainty surrounding the path of US interest rates is also increasing, particularly amid shifting expectations over the pace of monetary tightening in the United States.

With the current gap between Japanese and US interest rates expected to narrow, yen-funded carry trades are becoming less attractive, prompting investors to accelerate the unwinding of these positions and move funds back into the Japanese currency.

Bullish outlook

• Aninda Mitra, head of Asia macro and investment strategy at BNY Investments, said: “Recent moves depend heavily on how markets price the Federal Reserve’s interest rate path.”

• Mitra added: “We estimate the yen’s fair value to be around ¥140 against the dollar, so a renewed move toward those levels should not be entirely surprising, after we clearly saw the yen weaken excessively to extreme levels.”