The yen surged nearly 1% against the dollar, reaching around 158.22 during New York trading, marking one of the strongest single-day increases since the US-Japan joint intervention about a month ago; it continued to rise in Asian trading, peaking at 157.545, the strongest in nearly a month.

The driving force is not the announced policy decisions. Overnight index swaps have nearly fully priced in a 25 basis point rate hike at the September 18 meeting, leaving a very small probability for a 50 basis point increase. Committee member Takeda Soichi stated that rate hikes should be "flexible" to respond to rising inflation pressures, and there is no need to adhere to a fixed semi-annual rhythm expected by the market; a 25 basis point increase is "not set in stone," and consecutive rate hikes are generally possible. Governor Ueda Kazuo mentioned at the G20 that as potential inflation approaches 2%, risk management requires more focus on upside risks than before, and a rate hike in September is under discussion.

The current policy rate is 1%, raised from 0.75% in June, marking a 31-year high. The July meeting kept rates unchanged, but the statement was the first to warn of potential inflation exceeding targets. After a meeting between US Treasury Secretary Yellen and Ueda, Yellen publicly urged Japan to take "decisive" monetary steps to address the weak yen. The yield on 10-year Japanese government bonds rose to 3.015%. Analysts suggest that this movement in the yen resembles a price inquiry rather than the joint buying intervention seen on July 31; the yen had previously hit a 40-year low of about 163.98 before intervention, strengthening to around 155.21 afterward, but then retracing about half of that gain.

The dollar index fell, with the euro and pound both declining about 1% against the yen. Rising oil prices and US bond yields continue to limit a one-sided reversal of the dollar against the yen. US non-farm payrolls data on Friday will provide clues about the Federal Reserve's path, with the market expecting about 58,000 new jobs in August and an unemployment rate holding at 4.1%. No policy decisions have yet been made at this meeting.

Who is buying and who is selling: The event-driven factor is the repricing of Japan's rate hike rhythm from "semi-annual" to "data-triggered and potentially consecutive," not a sudden change in the trade balance. Buyers of the yen are accounts closing carry trade shorts and hedging against intervention tails; sellers are those still relying on the Japan-US interest rate differential for financing. Beneficiaries include short-end Japanese government bond shorts and yen longs that have already priced in a 25 basis point hike in September, while global risk assets financed by low-rate yen are under pressure. Rumors of price inquiries have re-priced intervention options, and the flexibility of rate hikes has shifted the term premium from a calendar basis to inflation data.

Source: Public Information