The Japanese yen eased against the US dollar on Friday after a strong run that has put the currency on course for its biggest weekly gain in more than a month, as investors increased bets that the Bank of Japan could raise interest rates later this month.
The yen had climbed to 155.25 per dollar during Asian trading, approaching the 155.20 level reached last month following Japan’s intervention in the foreign exchange market. It subsequently weakened to 156.38 per dollar, representing a decline of about 0.4 per cent on the day.
Despite Friday’s retreat, the yen remained on course for a 2.2 per cent gain for the week, its strongest weekly performance since late July, when Japan and the United States carried out a rare joint intervention to stem a prolonged decline in the currency.
Analysts said the latest yen appreciation appeared to be driven largely by changing expectations over monetary policy rather than confirmed government intervention.
The market is increasingly anticipating a more hawkish stance from the Bank of Japan when its policymakers meet on September 17 and 18, with investors closely watching for signals on the timing and pace of further rate increases.
Japan’s top currency diplomat, Atsushi Mimura, added to market uncertainty on Friday when he said authorities remained vigilant over exchange-rate movements and maintained constant communication with US officials.
The comments renewed speculation that Tokyo could intervene again if the yen comes under renewed pressure.
Ray Attrill, head of foreign exchange strategy at National Australia Bank, said traders were becoming increasingly nervous about the possibility of further official action.
“I think the market is getting a little bit more jittery about what might be forthcoming effectively, and potentially the intervention threat is still there,” Attrill said.
He added that a sustained break below the 155-yen level remained unlikely without a major policy development.
“Unless we get some significant policy surprises, or much more aggressive intervention by the U.S. Fed on behalf of the yen, our view at the moment is that we are unlikely to see a sustained move below 155, at least not in the coming weeks,” he said.
JPMorgan warns of possible sharper yen gains
While expectations of stronger yen demand have increased, JPMorgan cautioned that some of the market's bullish assumptions may already be excessive.
The bank said expectations surrounding repatriation flows from Japanese pension funds and a possible Bank of Japan rate hike “look somewhat overdone” at present.
However, it warned that a large-scale unwinding of yen short positions could trigger a much more substantial appreciation of the Japanese currency.
JPMorgan estimated that between 16 trillion and 17 trillion yen ($102.36 billion to $108.76 billion) in short positions could potentially be unwound, a development that could push the dollar down to between 142 and 146 yen.
The options market is also signalling growing confidence in the yen. Traders are currently the most bullish on the currency over a three-month horizon since May 2025, excluding the period surrounding Japan’s last intervention in late July, when the yen surged against the dollar.
Dollar steady ahead of US payrolls
Broader currency markets remained relatively subdued as investors awaited the latest US nonfarm payrolls report, due later on Friday.
The dollar index, which measures the US currency against a basket of six major currencies, was marginally higher at 99.02.
The euro was little changed at $1.162, while the British pound was also broadly steady at $1.3535.
Economists expect the US employment report to show that job creation recovered last month following an unexpected contraction in July.
The data could influence expectations about the Federal Reserve’s interest-rate path, although some analysts believe inflation figures due next week could ultimately prove more important for the dollar.
Federal Reserve Chair Kevin Warsh has played down concerns over recent weakness in private-sector employment growth, while other policymakers, including Governor Christopher Waller, have indicated that they are becoming less concerned about inflation despite oil prices hovering around $95 a barrel.
MUFG currency strategist Lee Hardman said those factors could limit the impact of Friday’s payrolls figures on monetary-policy expectations.
“The U.S. rate market currently judges that there is close to a 50:50 probability of a Fed rate hike this month after it was pricing in closer to a 70% probability of a hike at the start of this month. The dovish repricing of Fed rate hike expectations in recent days has been encouraged by the cautious comments from the Fed’s leadership over the need for rate hikes,” Hardman said.
With investors balancing the prospect of a Bank of Japan rate increase against shifting expectations for US monetary policy, the yen’s next move is likely to depend on a combination of Japanese policy signals, US economic data and the ever-present possibility of currency-market intervention.
For now, the yen remains on track for its strongest weekly performance in weeks, even as Friday’s pullback underscored the volatility surrounding the Japanese currency.