Yen Tumbles Towards Intervention Zone Amid BOJ Rate Hike Expectations

The yen's decline has persisted despite recent intervention efforts from Japan and the US. The currency is hovering at 159.37 per U.S. dollar, inching closer to the crucial 160 level that could trigger another bout of intervention. Tokyo spent billions propping up the yen in April-May and again in July, but its weakness continues mainly due to the interest rate difference between Japan and other major currencies.

The math has not shifted enough to change the yen's trajectory. The 10-year U.S. Treasury still yields close to 4.7%, versus under 2.9% for 10-year Japanese government bonds. This gap is wide enough to keep the carry trade chugging along, making it unlikely that intervention efforts will be successful.

Markets are now wagering on a faster pace of hikes from the Bank of Japan, with traders betting on rate increases in September. Tokyo's former top currency diplomat Mitsuhiro Furusawa agrees, saying 'most market players believe the BOJ will raise rates in September and I think it should.' What is more crucial, he says, is for the central bank to communicate a faster pace of hikes.

The yen may also be helped by recent benign U.S. inflation reports that lowered the odds of an imminent rate hike from the Federal Reserve, although this risk lingers especially as a peace deal in the Middle East remains elusive.