USD/JPY Surges as September Rate Hike Odds Rise to 82% Amid Carry Trade Frenzy

The USD/JPY pair has broken above the 159 level and is heading towards the 160 mark, with an 82% probability of a September interest rate hike from the Bank of Japan (BoJ) according to recent forecasts.

The currency has recovered around 45% of its losses since the coordinated intervention by Japan and the US in late July, which pushed the pair to a 40-year high of 163.73 before it dropped sharply into the mid-156 area.

The data shows that Japanese investors have been net buyers of foreign equities and long-term bonds, worth over $5 trillion yen, after the intervention, turbo-charging the carry trade. This has created a policy trap for Tokyo, as any future intervention may attract more domestic buying, funding further yen weakness.

The BoJ's decision to hike interest rates by 25 basis points to 1.25% at its September meeting is expected to reduce the rate gap between Japan and the US, making the carry trade less attractive.