Yen Gains Sparked by Tighter BoJ Policy Expectations

The Japanese yen has made a sharp rebound against the US dollar over the past two days, gaining around 3% in value. This recovery comes just over a month after Japanese authorities intervened heavily to support the currency.

Capital Economics notes that there is little evidence of fresh intervention from the Ministry of Finance, with no official or media indications of active yen buying. Instead, expectations for tighter monetary policy from the Bank of Japan (BoJ) appear to be driving the currency's gains.

Hawkish signals from policymakers have strengthened expectations for a rate increase at the September meeting, with money markets now pricing in a greater than 50% chance of two 25-basis-point hikes by year-end. Additionally, reports that Japan's Government Pension Investment Fund (GPIF) could rebalance its portfolio toward domestic assets may also support the currency.

However, concerns surrounding Japan's fiscal outlook continue to weigh on the yen, and Capital Economics warns that the currency's gains may be short-lived if intervention is not forthcoming. The BoJ has repeatedly fallen short of hawkish market expectations in recent years, leaving investors uncertain about its future policy decisions.