The Japanese yen strengthened sharply on September 7, climbing to its highest level since February this year. During the London trading session, the dollar-yen pair fell approximately 1.4% to 154.06 before trading around 154.38, marking a decline of about 1.2% for the dollar against the yen on the day. Just last week, the dollar-yen pair had been hovering near the 160.39 level. The yen has rebounded noticeably within just a few trading sessions, accumulating a gain of roughly 2.4% over the previous week. With US markets closed for the Labor Day holiday, liquidity conditions were thin, which amplified the currency's price movements.

One significant indicator of this yen appreciation was the dollar-yen pair breaking below the 155 threshold. This level had previously been viewed by the market as a critical support zone established after joint US-Japan intervention during the summer. After the pair fell through 155, the yen advanced further to around 154, which also meant that the low point formed following the earlier intervention was breached. The Japanese Ministry of Finance has not yet issued any new intervention statement regarding the September 7 exchange rate movements. Market attention now shifts to the Bank of Japan's monetary policy meeting scheduled for September 18.

Breaking below 155 triggers stop-losses, accelerating yen gains

The yen's rapid appreciation on that day largely occurred after the dollar-yen pair dropped below the 155 level. Masahiko Loo, senior fixed income strategist at State Street Investment Management, noted that 155 had repeatedly served as an important support level following several rounds of currency intervention, making a break below this level technically significant. Additionally, real money accounts rebalancing their asset allocations at the start of the new month provided further support for the yen. Traders reported that a considerable build-up of dollar long stop-loss orders had accumulated below the 155 level. Once this key price point was lost, these stop-losses were triggered in a concentrated manner, forcing some options market makers to sell dollars and buy yen for hedging purposes, which further expanded the yen's gains.

Motonari Sakai, head of foreign exchange trading at Mitsubishi UFJ Trust Bank, pointed out that with New York markets closed and trading volumes thin, the dollar-yen pair is often more prone to rapid one-way moves. From a technical perspective, the 154 level has now emerged as a new key area. If the dollar-yen pair were to break below the February low, the next notable support level could be around 152. Options markets also indicate that investors are increasing their protection against further yen appreciation. Last Friday, implied yen volatility rose to its highest level since January, and the cost of options protection betting on continued yen strength is also near this cycle's highs.

Rate hike expectations become a major driver of the yen's renewed strength

Compared with previous yen rebounds that relied mainly on government intervention, the more important change behind this latest rally is the noticeably heightened market expectations for further rate hikes by the Bank of Japan. Stefan Angrick, economist at Moody's Analytics, said that markets are now more confident that the Bank of Japan will continue to raise interest rates, which is why the yen is regaining favor among investors. For a long time, Japan's ultra-low interest rates have made the yen one of the world's primary funding currencies. Investors have borrowed low-cost yen to purchase higher-yielding overseas assets, a strategy known as the carry trade, which has long suppressed the yen's exchange rate. If the Bank of Japan continues to hike rates while US monetary policy stabilizes or even turns dovish, the narrowing of the US-Japan interest rate differential would weaken the appeal of carry trades and push some funds back into buying yen.

Bank of Japan board member Hajime Takata said last week that a 25-basis-point rate hike is "not necessarily already set in stone," but that consecutive rate increases are generally possible. Market pricing for a 25-basis-point hike at the September 18 Bank of Japan meeting has now risen to approximately 75%. Barclays economists believe that after this rapid yen rebound, the bar for further significant appreciation has been raised, and whether the next leg of the move can continue will depend on whether the Bank of Japan translates its recent hawkish policy signals into concrete action at the September meeting. Nomura Securities analyst in the middle of the range previously noted that if the Federal Reserve leans toward holding rates steady in September while the case for a Bank of Japan rate hike continues to strengthen, the yen could still have room to strengthen further in the near term.

Fed policy also determines the next direction for dollar-yen

Whether the yen can continue its appreciation will depend not only on the Bank of Japan but also on the path of US interest rates. The US will release its August Consumer Price Index this week. The inflation data could potentially reshape market expectations regarding the Fed's September policy decision and further alter the US-Japan interest rate differential outlook. If US inflation cools and markets further reduce expectations for Fed rate moves, while the Bank of Japan maintains its hawkish stance, the dollar-yen pair could remain under pressure. Conversely, if US inflation reaccelerates beyond expectations, pushing US Treasury yields higher, that could partially offset the boost to the yen from Bank of Japan rate hike expectations. As such, trading in the dollar-yen pair heading into mid-September has effectively entered a phase where both Fed expectations and Bank of Japan rate hike expectations are being priced in simultaneously.

Japan's annual intervention scale has already reached a record high

Beyond monetary policy, investors remain focused on whether the Japanese government will re-enter the foreign exchange market. Atsushi Mimura, Japan's vice finance minister for international affairs, stated last Friday that the government's "fighting stance" on currency matters has not changed. Notably, when he made this comment, the yen was already in an appreciation phase. There is also another layer of speculation regarding capital flows, namely that Japan's Government Pension Investment Fund may increase its domestic asset allocation. If the large pension fund reduces its overseas holdings and increases Japanese domestic assets, this could generate demand to sell foreign currencies and buy yen.

Van Luu, head of global fixed income and foreign exchange strategy at Russell Investments, believes that the impact of the first round of official intervention has gradually faded. If this round of yen appreciation is driven more by market's own capital flows and monetary policy expectations, its sustainability may actually be more noteworthy. The government's large-scale intervention is also clearly reflected in changes to foreign exchange reserves. Ministry of Finance data shows that Japan's foreign exchange reserves fell from $1.287 trillion in July to $1.207 trillion in August, a monthly decrease of about $80 billion, the largest decline on record. Ministry of Finance officials stated that the decline was mainly due to foreign exchange intervention aimed at supporting the yen, as well as changes in the market value of held bonds.

Loo believes that this largely reflects the Japanese government selling dollars and buying yen for policy intervention, rather than indicating any strain on the country's foreign exchange reserves. According to Ministry of Finance statistics, Japan's cumulative intervention from April to May this year totaled approximately 11.73 trillion yen, followed by another roughly 15.4 trillion yen injected between late July and August, bringing the annual total to about 27.1 trillion yen. This already surpasses the record set in 2003 of approximately 20.4 trillion yen, making this year the highest annual amount of currency intervention in Japan's history.

From 163.98 to 154, the market logic is changing

On July 23, the dollar-yen pair rose to 163.98, putting the yen near its weakest level in about 40 years. Subsequently, joint US-Japan buying of yen triggered a rapid rebound in the exchange rate, but the appreciation driven by that intervention was quickly absorbed by the market. This latest move is different. The dollar-yen pair has not only broken back below the 155 level, which was previously seen as an important post-intervention bottom, but has also continued to push toward 154 without any confirmation of fresh official intervention. This suggests that the force driving the yen higher is gradually shifting from pure government intervention toward a combination of interest rate differential expectations, stop-loss trading, and real money flows. Going forward, whether the 154 level is effectively broken will be a key short-term technical point to watch; from a fundamental perspective, the Bank of Japan's September 18 meeting and US August inflation data will determine whether this round of yen appreciation can be sustained further.