Tokyo – The yen’s strongest rally in 18 months could stall at the Bank of Japan’s upcoming policy meeting. After a sudden hawkish shift in central‑bank rhetoric earlier this month, the currency jumped 5% against the dollar, reaching a seven‑month high of 152.89 per dollar.
Market expectations and BOJ stance
U.S. Treasury Secretary Scott Bessent urged the BOJ to “do the right thing,” prompting speculation that the bank might double the pace of rate hikes to once per quarter, pushing the terminal rate above 2% from the current 1%.
Masafumi Yamamoto, chief currency strategist at Mizuho Securities, cautioned that even if the BOJ raises rates, it may still lag behind market expectations. “The market is pricing in too much. Above 2% for the terminal rate is too high. It will damage the Japanese economy,” he said, adding that a retreat toward 157 yen per dollar remains possible.
Yield gap and external pressures
Analysts note that a Federal Reserve hike expected on Wednesday could erase the BOJ’s recent gains. With both central banks tightening in tandem, the yield gap on 10‑year bonds could stay near 200 basis points, a key factor that has historically weakened the yen.
Compounding the challenge, Japan’s terms of trade are worsening as the nation remains dependent on imported oil amid the ongoing U.S.–Israeli conflict with Iran.
Speculative positioning
Short positions on the yen hit record levels at the start of the month, but recent Commodity Futures Trading Commission data show that speculative bets have flipped to a net‑long stance for the first time since February. Analysts interpret the flushing of short positions as a bearish signal, creating room for traders to rebuild shorts.
Despite optimism around U.S.-centered AI investments, Japanese capital continues to flow overseas. In August, investors poured 1.3 trillion yen ($8.4 billion) into foreign equities, according to the finance ministry.
Government pension fund speculation
Speculation has swirled that the Government Pension Investment Fund (GPIF) could repatriate large sums of capital to domestic stocks and bonds. The fund’s recent board minutes highlighted “the basic portfolio” as a discussion point, a departure from the March meeting where no review was deemed necessary.
GPIF spokespersons declined to comment on the speculation, noting that the fund assesses its portfolio annually. Morgan Stanley’s Koichi Sugisaki warned that any repatriation would likely be a temporary flow, comparable to forex intervention, and would not shift fundamentals that point to a yen rate of around 167 per dollar.
With Japanese 10‑year yields now near 3%, returns would still fall short of GPIF’s target of 1.9% plus nominal wage growth, which Morgan Stanley estimates at 3%‑3.5%.
Outlook
Investors and policymakers alike will watch Friday’s BOJ decision closely. While a rate hike could provide short‑term support, analysts stress that market expectations may already be priced in, leaving the yen vulnerable to a reversal if the central bank does not exceed those expectations.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
