Tokyo spent $98.7 billion buying yen between July 30 and Aug. 26, as markets priced in a possible 25-basis-point Bank of Japan rate hike to 1.25% on Sept. 18, supporting the Japanese currency’s recovery and pushing the dollar-yen pair down from near 164 to around 153.
Reserves decline as intervention is funded
Japan’s total reserves fell to around $995 billion by the end of August, while securities, which make up most foreign assets, stood at $839.6 billion. The intervention involved selling foreign securities, mostly U.S. Treasury bonds, to provide the dollars needed to buy yen.
Japan can also use the Federal Reserve’s repo facility for foreign and international monetary authorities, known as FIMA, to obtain dollars against its U.S. securities without selling them directly. This provides another way to finance intervention and limits potential pressure on the Treasury market.
Rate expectations support the yen
Markets expect a 25-basis-point rate hike to 1.25% on Sept. 18, along with further monetary tightening during 2027. An economist survey showed that most respondents expect the policy rate to reach at least 1.50% by March, as Bank of Japan officials increasingly focus on responding to persistent inflation.
Economic indicators support the Bank of Japan’s ability to continue tightening, after second-quarter gross domestic product growth was revised to 1.4% on an annualized basis, while real wages rose 2.4% year on year in July.
Rising Japanese rate expectations make it less attractive to borrow yen to buy higher-yielding overseas assets, increasing the likelihood that carry trades and long-dollar positions will be unwound. Improved domestic yields could also encourage Japanese investors to repatriate some of their funds.
Technical levels for the dollar-yen pair
The dollar-yen pair lost its short-term uptrend after nearing 164 and fell to around 153. The 126-day moving average at about 153 is approaching the long-term rising trendline extending from the low at 128, putting the 152–153 area at the forefront of levels under watch.
The technical picture makes defending the 152–153 area the basis for a recovery scenario, with a rebound above 156 seen as easing selling pressure. A move above 160.45 could again bring the U.S.-Japan interest-rate differential into focus for the market.
Conversely, a move below 152 would strengthen the pair’s bearish scenario, bringing 150 and then the 146–142 range into view, particularly if expectations for Bank of Japan rate hikes continue to rise.
