Why Did the Yen Surge 2%? Rate Hike Bets Trigger Carry Trade Unwinding

The yen has surged nearly 3% over two days, its biggest gain since August 2024. The immediate trigger was hawkish remarks from Bank of Japan Governor Kazuo Ueda and board member Hajime Takata, hinting at the possibility of a significant rate hike at the September policy meeting. Nomura Securities sees a high probability of a 25-basis-point hike this month, and in an extreme scenario, three consecutive hikes. Rising rate hike expectations have sparked a massive unwinding of yen carry trades, putting pressure on high-yield currencies like the Brazilian real and South African rand.

The yen strengthened sharply this week, driven by a concentrated unwinding of carry trades triggered by hawkish signals from the Bank of Japan.

On Thursday, the yen rose more than 2% against the dollar in a single day, hitting a near one-month high and approaching levels seen after Japan's Ministry of Finance intervened in May, with gains extending into Friday.

The immediate catalyst for this move was hawkish comments from Bank of Japan Governor Kazuo Ueda and board member Hajime Takata this week, both hinting at the possibility of a significant rate hike at the central bank's September 18 policy meeting. Interest rate swap markets have now fully priced in a 25-basis-point hike by the BOJ this month, along with roughly 75 basis points of additional tightening by next July.

As rate hike expectations heat up, carry trades that borrow in low-yielding yen to invest in high-yielding assets are facing systemic unwinding pressure. High-yield currencies such as the Brazilian real, South African rand, and Mexican peso all fell more than 1% against the yen on Thursday, indicating that the capital exodus extends beyond dollar assets.

Bank of America said the dollar-yen move "reflects a full-scale reallocation of market risk over the past 48 hours."

Yen's Surge Briefly Sparks Intervention Speculation; Hawkish Signals Trigger Massive Unwinding

The yen rallied for two consecutive days on Wednesday and Thursday, gaining nearly 3% cumulatively—its largest two-day gain since August 2024. Wall Street News noted that markets briefly speculated Japanese authorities had intervened again, but BOJ account data showed no official hand behind the rally.

According to Bloomberg analysis, the gap between the BOJ's current account forecast released Thursday and money broker estimates was far too small to support the judgment of "large-scale yen buying" intervention.

Bloomberg's analysis of the data shows the BOJ forecast its current account would decrease by 410 billion yen due to fiscal factors, while the average estimate from three money brokers—Central Tanshi, Ueda Yagi Tanshi, and Tokyo Tanshi Research—was a decline of about 700 billion yen. The difference is far less than 729 billion yen, the smallest intervention amount by Japan since 2022.

Yuichiro Takai, a researcher at Totan Research, said:

Based on this data, it is reasonable to conclude that no intervention occurred this time.

The core driver of the yen's sharp rise is a sudden shift in market expectations for the BOJ's policy path.

The remarks by Ueda and Takata this week caught markets off guard. CME data shows that on Thursday, trading volume in dollar-yen call options (bets on yen appreciation) was more than 2.5 times that of put options, as many traders moved to unwind previously accumulated short yen positions.

Sagar Sambrani, senior FX options trader at Nomura Securities in London, said:

We are witnessing a massive unwinding of yen-funded carry trades, with significant medium-term interest in holding the yen relative to other G10 currencies. The general market consensus seems to be that the era of easy carry trades is over, and the scale of cross-border capital flows from Japan to the US may have fundamentally changed.

Masayuki Nakajima, senior strategist at Mizuho Bank in London, noted that the move is "driven by the unwinding of yen shorts—mainly from hedge fund accounts," combined with strengthening expectations of further BOJ tightening, jointly driving a repositioning.

Meanwhile, Japanese exporters are also accelerating the conversion of dollars into yen, further boosting the yen. Positioning data shows that short yen positions remain substantial, suggesting unwinding pressure may persist.

The latest CFTC data for the week ending August 25 shows leveraged funds held net short yen positions of 81,619 contracts, while asset managers held net shorts of 18,284 contracts. Both categories have begun reducing shorts, but absolute levels remain elevated.

Nomura: Three Consecutive Hikes Possible in Extreme Scenario

Nomura Securities has offered a relatively aggressive scenario for the BOJ's future path.

Yujiro Goto, head of Japan FX strategy at Nomura Securities, said in a Bloomberg TV interview that a 25-basis-point hike this month "looks reasonable," and if yen depreciation continues toward the 160 level, consecutive hikes in October and December are "not impossible." That would mark a significant acceleration from the BOJ's pace of roughly two hikes per year since early 2024.

However, Goto's base case is relatively moderate; he sees a high probability of at least one hike per quarter thereafter, and maintains a dollar-yen target of 154.

He also noted that the government's stance on monetary policy will be a key variable in determining whether the yen's rally can be sustained. Investors are closely watching remarks from Prime Minister Sanae Takaichi, who has previously expressed reservations about rate hikes. Goto said:

If she remains negative on BOJ rate hikes, the market will be disappointed and the yen could be sold off again.

Conversely, if Takaichi avoids direct comment or emphasizes central bank independence, he sees room for the yen to strengthen further beyond 150.

Additionally, the Federal Reserve's moves pose a potential variable. If the Fed holds steady in September while the BOJ sends hawkish signals, the dollar-yen could break below 155 sooner than the market expects.