BoJ Hikes and Intervention Shift Yen Tide

The yen's story is becoming more interesting as some of its long-standing supports are shifting. For years, the yen was cheap due to Japan's domestic policy mix and global macro backdrop, but now those factors are changing.

Back in July, the bullish yen argument was clear: USD/JPY had detached from real rate differentials after Japan's Upper House defeat in 2025, its term premium kept grinding higher, and fiscal expansion pushed inflation risk higher. The BoJ then intervened with its largest FX intervention in 15 years, forcing a washout in tactical carry positioning and giving policymakers time to alter the domestic policy backdrop.

The BoJ accelerated the pace of hikes, stabilizing the rise in Japan's term premium, which has offset some of the inflationary impulse from fiscal expansion. This changes the shape of the trade, making cheapness relevant again, but not necessarily leading to an immediate collapse in USD/JPY.