The Japanese yen surged about 2.5% against the U.S. dollar in the first week of September, pushing USD/JPY below 155 despite a stronger-than-expected U.S. employment report and reviving concerns that a Bank of Japan rate increase could force a rapid retreat from yen-funded trades across global markets.
USD/JPY fell from roughly 160 at the start of the week to near 155 by Sept. 4, after reaching 160.39 in early trading. The pair’s nearly 2% decline on Sept. 3 was its largest one-day drop since currency-market action in late July, a period when official intervention was followed by a sharp but temporary yen recovery.
The move came as markets sharply increased expectations that the Bank of Japan would raise rates by 25 basis points at its Sept. 17–18 meeting. Overnight index swap pricing placed the implied probability of such a move between 94% and 99%, which would lift Japan’s policy rate to 1.25%, around three months after the previous increase in June.
Bank of Japan signals a readiness to tighten
Bank of Japan Governor Kazuo Ueda said policymakers would examine upside risks to prices at the September meeting and described financial conditions as remaining accommodative. Board member Hajime Takata added that policy normalization could proceed flexibly, including through consecutive rate increases.
These remarks have challenged a trade that has benefited from Japan’s historically low borrowing costs: borrowing yen and using the proceeds to purchase higher-yielding currencies or riskier assets. A stronger yen reduces the value of overseas positions when converted back into Japan’s currency, while higher Japanese interest rates raise the cost of maintaining the funding side of the trade.
Japanese government bond yields reinforced the shift. The 10-year Japanese government bond yield rose above 3% on Sept. 1, its highest level since 1996. Higher domestic yields narrow the gap with U.S. rates, reducing one of the main incentives for holding dollars against the yen.
The U.S. August jobs report, which showed payrolls increasing by 162,000, did not prevent the yen from strengthening. Currency markets instead focused on the prospect that Japan’s monetary policy could become less accommodative more quickly than previously expected.
Short yen positioning leaves room for abrupt reversals
Positioning data suggests that the speed of the yen’s rise may have reflected more than a change in rate expectations. Commodity Futures Trading Commission figures for Aug. 25 showed leveraged funds held a net short position of 81,600 yen contracts. Asset managers were net short 18,300 contracts.
Such positions can become vulnerable when USD/JPY falls through widely watched price levels. Traders who sold yen may need to buy it back to limit losses, accelerating a move that began with changes in interest-rate expectations. The drop from 160 toward 155 resembled that dynamic, with a large daily decline arriving after the pair had spent months trading near levels associated with official concern in Tokyo.
Japan’s Ministry of Finance has already demonstrated its willingness to intervene when it considers currency moves excessive. The ministry reported deploying about 11.73 trillion yen in currency operations between April 28 and May 27, followed by roughly 15.40 trillion yen between July 30 and Aug. 26. The combined total of about 27.13 trillion yen exceeded the approximately 24.5 trillion yen Japan spent across its intervention episodes in 2022 and 2024.
Late July remains the immediate reference point for traders assessing whether authorities may act again. USD/JPY fell from 163.99 to around 155.23 on the day of that operation before later recovering toward 160 as the yen weakened through late August. That rebound showed that intervention can alter the market’s direction quickly but may struggle to establish a lasting trend without support from monetary policy.
U.S. signals add to pressure on dollar-yen
Comments from Washington added another layer to the market’s attention on the yen. U.S. Treasury Secretary Scott Bessent issued statements in early September supporting Japan’s efforts to address yen undervaluation and limit excessive currency volatility.
In a Sept. 1 statement, the U.S. Treasury said Bessent had met Ueda and supported decisive market and monetary measures. The statement also warned that disorderly currency moves could trigger forced position unwinds and raise borrowing costs.
That language places the yen debate beyond the usual dispute over exchange-rate levels. A sharp reversal in the currency can affect global funding conditions because yen borrowing has long been embedded in cross-border financing and risk-taking strategies.
The Bank for International Settlements has estimated that foreign-exchange swaps and related forward contracts create roughly $80 trillion of off-balance-sheet dollar obligations globally. These contracts are routinely used by banks, companies and institutional market participants to obtain foreign-currency funding, though the figure does not measure yen carry trades specifically.
Estimates of total yen-funded carry exposure vary widely, and the available figures do not provide a precise measure of positions tied directly to USD/JPY. The scale of short-yen futures positioning and recent movement in Japanese yields nevertheless indicate that a policy surprise from Tokyo could produce broader adjustments in leveraged markets.
Crypto markets face a familiar funding-risk test
Digital-asset markets are especially sensitive to abrupt shifts in funding conditions because cryptocurrency trading operates continuously and leverage can be liquidated automatically at any hour. A rapid yen rally can pressure risk assets when traders close positions financed by cheap borrowing or reduce exposure ahead of higher volatility.
The comparison frequently drawn by market participants is August 2024, when a Bank of Japan rate increase of 0.15 percentage points preceded a severe cross-asset selloff. The Nikkei 225 fell nearly 20% over three sessions, including a 12.4% one-day drop, while the Nasdaq 100 declined 5%, Nvidia fell 14% in one session, and Bitcoin dropped 15%, according to market-price data from that period.
The September meeting will show whether the Bank of Japan views its next move as an isolated adjustment or part of a sustained normalization path. Guidance suggesting further increases would place additional pressure on the long-standing assumption that yen funding will remain exceptionally cheap.
USD/JPY’s behavior after the decision will be equally revealing. A renewed move toward 160 could revive concerns about official currency action, while a durable decline would indicate that higher Japanese yields and reduced short-yen positioning are beginning to reshape one of the market’s most persistent trades.
To navigate yen volatility and rate shifts, explore interest rate impacts on broader macro and crypto markets.
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