The yen sharply rose by 1.2%! Doubts about U.S.-Japan intervention resurface, and the Bank of Japans rate hike in September is "just around the corner."

On Wednesday, the Japanese yen suddenly strengthened significantly against the US dollar, rising by 1.2% at one point to 158.22 yen per dollar, quickly sparking market speculation about potential interventions in the currency market by Japan, or even by both Japan and the US. Meanwhile, one of the most hawkish members of the Bank of Japan's policy board, Takeda Haruhiko, sent a stronger signal for interest rate hikes, not only leaving open the possibility for larger hikes but also mentioning the room for consecutive increases. With the Bank of Japan's monetary policy meeting approaching in September, market expectations for further tightening of Japan's monetary policy have noticeably intensified. The yen's sudden surge quickly affected the global forex market. The Bloomberg Dollar Spot Index fell 0.3% during trading, marking the largest intraday drop since August 21, while the emerging market currency index reached an intraday high. Bank of America forex strategist Alex Cohen stated, "The market remains highly vigilant regarding potential interventions in the forex market." It is not yet possible to confirm whether the yen's sudden appreciation on Wednesday is related to official intervention. Monex forex trader Andrew Hazlett indicated that there were indeed rumors of intervention, but he expressed skepticism given the magnitude of the yen's rise. Nonetheless, the simultaneous unusual movements of the yen against both the US dollar and the euro are also hard to fully explain by other factors. The US Treasury has not yet confirmed if they participated in any forex market interventions or conducted currency pricing evaluations that day. The yen's sudden rise of 1.2% has heightened market vigilance regarding possible official intervention once again. The swift speculation of intervention related to the yen's unusual movements is closely tied to the Japanese government's recent large-scale efforts to support the yen. Data from the Japanese Ministry of Finance shows that after the yen fell to its lowest level in nearly 40 years, Japan has used a record $96.4 billion in the past month to support its currency. More importantly, the US had also rarely joined in the actions before. About a month ago, Tokyo and Washington teamed up to buy yen, marking the first coordinated intervention in the yen's exchange rate since 1998. At that time, the yen fell to about 164 yen per dollar, the lowest level since 1986, and the joint intervention quickly pushed the yen back up to near 155, reflecting an overall rebound of about 5%. Since then, both the US and Japan have signaled that if there are excessive and disorderly fluctuations in the forex market again, further coordinated actions should not be ruled out. Japanese officials have repeatedly emphasized that whether to intervene in the forex market does not depend on a specific exchange rate level, but rather on the speed of the yen's depreciation and whether the market volatility is becoming disorderly. The sudden and significant rise of the yen on Wednesday has prompted traders betting on a decline in the yen to be more alert. In addition to the potential for official intervention, expectations surrounding the Bank of Japan's policy are also an important factor driving the yen's strength on Wednesday. Bank of Japan board member Takeda Haruhiko sent clear hawkish signals on Wednesday, leaving the possibility for hikes exceeding the usual magnitude and consecutive rate increases open. The Bank of Japan had waited about six months before its last rate hike in June of this year, so if it raises the policy rate again in September, it would clearly signal a faster pace of normalization in Japan's monetary policy. However, Takeda's further suggestion of the possibility of consecutive hikes or larger measures has led the market to contemplate whether the Bank of Japan will adopt a tighter policy than previously expected. Currently, the Bank of Japan's benchmark interest rate stands at 1%. The futures and swap markets show that investors have fully accounted for the likelihood of a 25 basis point increase in the Bank of Japan's upcoming September 17-18 meeting. This means that there is already a fairly high market expectation for Bank of Japan Governor Ueda Kazuho heading into the September meeting. If the central bank ultimately does not raise rates, it would not only surprise the market but could also lead to a significant depreciation of the yen once again. US Treasury Secretary Yellen has been applying pressure, and the likelihood of a rate hike during the September meeting of the Bank of Japan is becoming increasingly imminent. The Bank of Japan is also facing pressure from US Treasury Secretary Yellen. Recently, Yellen has repeatedly urged the Bank of Japan to take appropriate monetary policy actions through public speeches, social media, and conversations with Japanese officials, expressing hope that Ueda Kazuho would "do the right thing" in terms of monetary policy. Earlier this week, Yellen also met with Ueda Kazuho during the G20 meeting in North Carolina, where they discussed the importance of stabilizing inflation expectations and avoiding excessive currency fluctuations through robust policy-making. Ueda subsequently stated that the Bank of Japan would decide on monetary policy based on its assessment of inflationary risks, which the market interpreted as the central bank not intending to wait until October to act. Takeda's further hawkish signals on Wednesday intensified the expectations for a rate hike in September. Ayako Fujita, Chief Japan Economist at JPMorgan Securities, remarked, "Given the level of statements coming from the US, if the Bank of Japan does not take action, I think it will pose a challenge." However, she also warned that if the market forms the impression that the Bank of Japan can only raise rates with US support, it may weaken the actual policy effect of the rate hikes. Failing to raise rates might strike a blow to the yen, and a mere 25 basis point increase might not suffice. This puts Ueda Kazuho in an increasingly difficult position. If the Bank of Japan does not raise rates in September, given that the market has almost fully factored in a 25 basis point hike, the yen could face heavy sell-offs. A significant depreciation of the yen could again push up import goods and energy costs, further increasing domestic inflation pressures in Japan. The market currently expects Japan's inflation rate to approach 3% later this year. However, even if the Bank of Japan raises the policy rate by 25 basis points as the market anticipates, its effect on supporting the yen may not be very pronounced, especially as Takeda has already mentioned the possibilities of larger and consecutive hikes, which might have heightened expectations for the central bank's policy measures. James Athey, a fund manager at Marlborough Investment Management, stated that the Bank of Japan needs to raise rates and deliver a stronger policy signal, or else the efforts previously made to stabilize the yen may be undermined. He believes that the Bank of Japan's decision not to raise rates in July was a critical mistake, as the interventions in the currency market and political statements at that time had actually created conditions for further tightening of policy. The yen is still pressured by the US-Japan interest rate differential and concerns about fiscal policy, with hedge funds reinstating their short positions. Although expectations for official intervention and interest rate hikes by the Bank of Japan have supported the yen, the factors that have driven the yen's long-term weakness have not completely disappeared. There remains a significant interest rate gap between Japan and other major economies, while Prime Minister Kishi Matsumoto's aggressive fiscal spending plans have also heightened investors' concerns about Japan's fiscal outlook. Speculative funds have also turned back to shorting the yen. After the joint intervention by Japan and the US, hedge funds initially reduced their short positions on the yen sharply, but have recently begun re-establishing those positions. In response to continued pressures on the yen, it is reported that Prime Minister Kishi Matsumoto's government currently supports further rate hikes by the Bank of Japan in the near term, potentially as soon as September. The yield on Japan's 10-year government bonds has risen above 3%, increasing global bond market contagion risks. Another challenge facing the Bank of Japan comes from the bond market. Recently, Japanese government bonds have continued to be sold off, with long-term interest rates reaching their highest level since the mid-1990s. The yield on Japan's 10-year government bonds rose to 3% on Tuesday, reaching this level for the first time since 1996. Meanwhile, the yield on US 10-year Treasury bonds approached 4.82% on Wednesday, nearing its highest level since Yellen took office as US Treasury Secretary. Japan's bond yields have long been seen as a key "anchor" for global interest rates. As Japanese interest rates continue to rise, investors are increasingly concerned about the potential outflow of funds from overseas markets back to Japan, further impacting US Treasury bonds and other global fixed income assets. Nobuyasu Atago, Chief Economist at Rakuten Securities Economic Research Institute and former official at the Bank of Japan, stated that one reason Yellen has urged the Bank of Japan to raise rates is that she believes it will help control the rise of global bond yields, which is also in line with US interests. Yellen has previously stated that if the yen experiences extreme and disorderly fluctuations, it may ultimately transmit to US financial markets and raise US interest rates. If the yen continues to depreciate, the Japanese government selling some of its US Treasury assets to stabilize its currency could further increase long-term financing costs in the US. This is also one of the important backgrounds for the US's rare participation in supporting the yen previously. The real question may still lie in fiscal policy. However, there remain doubts about how much the Bank of Japan's interest rate hike can lower long-term government bond yields. A core issue facing both the US and Japan's bond markets recently is investors' concerns about the continuous expansion of government fiscal deficits. Neither Prime Minister Kishi Matsumoto's government nor the Trump administration has yet proposed solutions sufficient to fundamentally alleviate market concerns regarding fiscal matters. Fujita of JPMorgan noted that the recent rapid rise in long-term interest rates cannot simply be attributed to the Bank of Japan. She stated that to truly alleviate pressures from yen depreciation and rising long-term interest rates, the Japanese government needs to provide the market with a credible signal of fiscal policy. This means that even if the Bank of Japan raises rates in September, monetary policy alone may not be able to solve the issues of yen weakness and rising long-term government bond yields. As the Bank of Japan's meeting on September 17-18 approaches, the focus of the market has shifted from merely "whether to raise rates" to "by how much, whether there will be consecutive hikes, and how strong of a hawkish signal Ueda will send." With a 25 basis point hike already fully priced in by the market, continued policy pressure from the US, and the yen still hovering near historical lows, any policy action from the Bank of Japan that falls short of market expectations could once again trigger significant volatility in the yen and further test the resolve of Tokyo and Washington to stabilize the forex market.