Yen Strengthens on Rising Hike Odds and Import Price Inflation Concerns

The yen has strengthened significantly over the past two days, with USD/JPY falling from around 160 to a one-month high near 155.2 as markets increase their bets on a Bank of Japan (BOJ) interest rate hike in September.

This move is attributed to rising expectations that the BOJ will raise its benchmark interest rate by 25 basis points to 1.25% at the September 17-18 meeting, following Tokyo's August core Consumer Price Index (CPI) printing above expectations at 1.8% year-on-year.

Prime Minister Takaichi has also publicly backed an early BOJ move, citing concerns that a weak yen is contributing to import price inflation, which has removed what the market viewed as the biggest obstacle to rate hikes.

The AUD/JPY cross has broken below its August support at 112.7, indicating that carry trade unwinding may be underway.