- The Japanese yen fell below 155 per dollar, reaching 152.89 on Tuesday
- The yen has gained nearly 4.5% since last week, leading G10 currencies
- Markets price a 97% chance of a 25-basis-point rate hike by BOJ in September
The Japanese yen has broken below the closely watched 155-per-dollar level, turning its sharp currency rebound into a major test for the Bank of Japan (BOJ) ahead of its September policy meeting.
The yen strengthened to 152.89 per dollar on Tuesday, its strongest level since February, extending a rally that has lifted the currency nearly 4.5% from around 160 at the start of last week.
The move has made the yen the strongest-performing G10 currency this month.
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According to Reuters, the immediate trigger is growing conviction that the BOJ could raise interest rates at its September 17-18 meeting.
Markets are pricing in roughly a 97% probability of a 25-basis-point increase, shifting attention towards what the central bank says about the path of further tightening.
Japan's economy has also supported the currency. Stronger-than-expected second-quarter growth and a sharp rise in wages have strengthened the case for further policy normalisation.
But the yen's rally is not only about interest rates. The break below 155 has triggered stop-loss orders and accelerated the unwinding of bearish positions against the currency.
Investors who had borrowed the low-yielding yen to invest in higher-returning assets are also facing greater pressure to unwind those trades, creating additional demand for the currency.
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That makes the BOJ's next decision particularly important. A 25-basis-point hike is increasingly expected, but investors may react more strongly to the central bank's guidance on the pace of future increases.
The dollar could provide another swing factor. US inflation data due this week will shape expectations for the Federal Reserve and the interest-rate gap between the two economies.
For now, the yen has moved decisively below 155 per dollar. The next question is whether the BOJ gives investors enough reason to push it towards the low 150s. Analysts are already watching the 152 area as the next important level.
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