The Japanese Yen makes a comeback! USD/JPY exchange rate rebounds from July lows, breaking through the key level of 140 after a year

During the Asian trading session on Monday, the US dollar against the Japanese yen exchange rate broke through the key psychological level of 140, continuing its upward trend since hitting a near 38-year low in July.

On Monday, the yen against the US dollar briefly appreciated by 0.6% to 139.96 yen per US dollar, the highest level since July 2023. The yen is the best-performing currency among the G10 countries this quarter, rising by 15% as investors expect the interest rate gap between the US and Japan to further narrow.

The Federal Reserve seems almost certain to cut borrowing costs on Wednesday, with the only question being by how much. Meanwhile, the Bank of Japan is expected to stand pat on Friday after raising rates twice this year. With reduced liquidity during the holiday period, traders are betting again on a larger-than-usual rate cut by the US, causing the Bloomberg Dollar Spot Index to fall to its lowest level since January.

Gareth Berry, a strategist at Macquarie Group in Singapore, said, "It's mainly the countdown to the Fed rate cut, and the risk that they might cut by 50 basis points this week instead of 25," which has supported the yen. "Even if expectations for Fed easing haven't changed, the mere passage of time will push the dollar lower against the yen."

Since hitting a low of 161.95 yen per US dollar on July 3, the fate of the yen has undergone a dramatic change. Japan has intervened in the market multiple times to boost the yen, but now the rapid rise of the yen has affected exporters' prospects, thereby impacting the Tokyo stock market.

While the Bank of Japan may not change borrowing costs this week, most economists surveyed believe there will be another rate hike in December. The Bank of Japan raised its policy rate to 0.25% on July 31, causing global markets to experience turbulence in early August, affecting assets from currencies to bonds and stocks.

On September 3, Bank of Japan Governor Haruhiko Kuroda confirmed that if prices match expectations, the bank will raise rates, supporting the yen's rebound.

Committee member Junko Nakagawa stated in a comment on September 11 that if the economic performance aligns with their forecasts, the bank will continue to adjust its policies.

In addition to the Bank of Japan's policies, the rapid unwinding of so-called carry trades has also driven the yen's appreciation. Carry trades involve traders borrowing yen at low rates and investing the proceeds in higher-yielding currencies.

Many strategists have abandoned their previous forecasts of a weaker yen and now expect the yen to appreciate from current levels.

In early July, when the yen hit multi-decade lows, some warned that even with Japanese intervention, they could not prevent the exchange rate from falling, with bears predicting the yen to fall below 170 against the US dollar.

Richard Franulovich, head of currency strategy at Westpac Banking Corporation in Sydney, said the US dollar against the yen may "continue to decline in the next one to three months, possibly between 137-138." The dovish Federal Reserve and the hawkish Bank of Japan "undeniably have been priced in, but reality may also have an impact."