During Monday's Asia trading session, the USD/JPY exchange rate broke through the key psychological barrier of 140, continuing its upward trend since reaching a near 38-year low in July.

On Monday, the yen briefly appreciated by 0.6% against the US dollar, reaching 139.96 yen per dollar, the highest level since July 2023. The yen is the best-performing G10 currency this quarter, rising by 15% due to investors expecting a further narrowing of interest rate differentials between the US and Japan.

The Fed seems almost certain to cut borrowing costs on Wednesday, with the only question being by how much. The Bank of Japan, after two interest rate hikes earlier this year, is expected to stand pat on Friday. With reduced liquidity during holiday periods, traders are betting heavily that the US will cut rates by a larger margin than usual, 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 a countdown to the Fed rate cut, and the risk they cut by 50 basis points this week rather than just 25," which has supported the yen. "Even if expectations for loose Fed policy haven't changed, the mere passage of time is pushing the USD/JPY lower."

Since hitting a low of 161.95 yen per dollar on July 3rd, the fate of the yen has seen a dramatic turnaround. Japan has intervened in the market multiple times to boost the yen, but now the yen's rapid appreciation is impacting exporters' prospects, further affecting the Tokyo stock market.

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

On September 3rd, Bank of Japan Governor Haruhiko Kuroda confirmed that if prices match expectations, the central bank will raise rates, a statement that has supported the yen's rebound.

Committee member Junko Nakagawa stated in a comment on September 11th that if the economic performance meets its forecast, the central bank will continue to adjust its policies.

In addition to the policy of the Bank of Japan, the so-called carry trade strategy being rapidly unwound has also contributed to the appreciation of the yen. The carry trade refers to traders borrowing yen at low interest rates and investing the proceeds in currencies with higher yields.

Many strategists have given up their previous predictions of a weakening yen and expect the yen to start appreciating from now on.

In early July, when the yen hit multi-decade lows, some warned that even with intervention by Japan, it would not be able to prevent the exchange rate from falling. Bears predicted that the yen-to-dollar exchange rate would fall below 170.

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

Editor/ping