Yen Surges Nearly 4% in September as Fed and BOJ Meetings Loom

The yen's rally over the past four weeks is now facing the Federal Reserve's rate decision on Wednesday. Whether the currency's recent strength continues or reverses may hinge on how large a move the Fed delivers.

On Monday, the yen was trading at 153.49 against the dollar, slightly below the seven-month high of 152.89 set the previous week. For the first time since February, speculative traders hold a net-long position on the yen, indicating a change in sentiment.

Why the Fed Comes First

Data released on Friday showed that US consumer prices picked up in August. Traders are now assigning an 86% probability to a Fed rate hike on Wednesday, according to the CME FedWatch tool, which derives its estimates from futures markets.

The Bank of Japan holds its meeting two days after the Fed, on Friday. Analysts at MUFG note that a 25-basis-point increase is already widely expected by the market. Still, they argue that for the yen to gain further, the BOJ must indicate that subsequent hikes will come more quickly.

If the BOJ refrains from signaling additional rate increases for October and December, a different risk emerges. According to TD Securities, that outcome could push the dollar-yen pair back to the 157–160 range.

The Stakes Reach Beyond Tokyo

Hedge funds have been repositioning their carry trades in response to the yen's fluctuations extending beyond Japan.

The impact is also being felt outside Japan. The US dollar index remained stable at 99.15 after falling for two consecutive weeks. Separately, the European Central Bank increased its key interest rate last week, while the Bank of England is anticipated to keep rates unchanged on Thursday, though the vote is expected to be tight.

James Athey, a fixed-income portfolio manager at Marlborough, offered a stark assessment:

“Not hiking would be a catastrophic error. Not communicating robustly will be a significant own goal.”

Athey additionally highlighted repatriation flows and changes in asset allocation at GPIF, Japan's large public pension fund. These factors, he noted, are already directing capital back into the yen independently of this week's rate decisions.

The yen has risen nearly 4% this month, intensifying the pressure on Japanese policymakers. However, the more significant signal could emerge from Tokyo rather than Washington DC. The durability of the yen's gains may be determined more by the BOJ's forward guidance on Friday than by the Fed's action on Wednesday.