Yen Strengthens on Rising BoJ Rate Hike Expectations and Intervention

The Bank of Japan's (BoJ) interest rate hike expectations have led to a strengthening of the yen, making it more challenging for Japan to defend its currency through intervention. According to recent data, Tokyo spent $98.7 billion buying yen between July 30 and August 26, reducing total reserves to roughly $995 billion by the end of August.

Most of these foreign assets are securities, with $839.6 billion held at the end of August. The intervention involved selling foreign securities, mainly U.S. Treasuries, to raise dollars needed to buy yen. However, Japan can use the Federal Reserve's FIMA repo facility to raise dollars against its U.S. securities without selling them outright.

The bigger issue is what happens next. Higher BoJ rate expectations are now doing part of the work in giving the yen a stronger policy argument for a sustained move higher. Markets are pricing a 25bp rate increase to 1.25% on September 18, with expectations for further tightening into 2027.