USD/JPY Breaks 155 on Third Test: End of Dollar Carry Trade?

Original from Stephen Innes

Compiled by Speedy @Odaily News

The third time often proves decisive, and in the foreign exchange market, this happens more frequently than people realize.

• A third test is not necessarily easier to break simply because it is the third. What makes the level significant is the two prior successful defenses. What changes is what accumulates around it: more traders recognize the line, more positions are built against it, more stops gather behind it, and more breakout traders wait on the other side.
• This is not a statistical rule, but the idea has stayed with me since my early days trading USD/JPY at a Japanese bank. The chief trader was so superstitious about round numbers and repeated tests that I nicknamed him the "Tokyo Round Number Prophet." He believed that the third serious test was often the key; and once a major USD/JPY level finally gave way, the market rarely looked back until the underlying mechanism itself began to lose momentum. Dark Side of the Boom.

USD/JPY finally broke below 155 on Sept. 7, after successfully defending the same area twice before—once after the Golden Week intervention and again after the late-July intervention. By early trading on Sept. 8, the pair had fallen below 154.50; and once the market broke through roughly 155.50—the level that marked the lows after the two intervention episodes—another yen level quickly vanished.

This is why this break matters more than the surface volatility suggests.

Markets remember levels, especially those that have been defended multiple times. The first test can be dismissed as noise, the second starts to build conviction, and by the third, the market has often accumulated enough positions around the idea that the bottom will hold again. When it finally fails, the move can accelerate because traders are not just reacting to new information; they are also unwinding the confidence built around that level.

That appears to be what happened here.

The immediate catalyst for the latest sharp decline remains difficult to pinpoint, but the macro narrative behind the yen has shifted markedly since mid-last week, and multiple forces are now pushing in the same direction.

The first is Washington.

U.S. Treasury Secretary Scott Bessent has become increasingly pointed in his comments on Japan's fiscal and monetary policies. Around the G20, he argued that Japan should move away from its reflationary stance and said he believed the Japanese government and the BOJ (Bank of Japan) would take steps that ultimately push the yen stronger.

The timing is striking because Japanese ministries have just submitted FY27 budget requests totaling roughly 143 trillion yen, well above the initial budget of about 122 trillion yen for the current fiscal year, reinforcing the impression that Japan's fiscal backdrop remains highly expansionary. Bessent's comments may simply have coincided with the data release, but in markets, timing often matters as much as intent.

The message heard by overseas investors is fairly direct: Washington wants a stronger yen, and Tokyo may have less room to ignore that preference than in the past.

That perception is reinforced by reports that Bessent had already expressed dissatisfaction with Japanese economic policy during his May visit, and by the widely held view that the coordinated intervention in late July was carried out with U.S. cooperation. Whether every detail of that story is accurate is almost secondary; what matters is that it gives global investors a political framework for expecting Japan to shift away from the reflationary policy mix that has long helped keep the yen weak.

The second factor is the BOJ itself.

Bessent met Governor Kazuo Ueda on the sidelines of the G20, and the U.S. Treasury subsequently emphasized the importance of monetary policy communication, inflation expectations, and avoiding excessive exchange-rate volatility. Ueda then said that rate hikes would be fully discussed at every meeting, including the next one, keeping the Sept. 17-18 meeting firmly in play for a possible hike.

BOJ board member Hajime Takata pushed the shift further, arguing the central bank should be prepared to raise rates flexibly rather than being bound by the pace the market already expects. He later played down the likelihood of a large move at the next meeting, but by then the market had absorbed the most important part of the message: the BOJ may be willing to act faster than investors had previously assumed.

This matters because the long USD/JPY trade has been built for much of the summer on a very comfortable foundation: U.S. rates stay high, Japanese rates stay low, the carry trade pays, and yen rallies are hard to sustain.

Now that policy gap may be narrowing from both ends.

The third leg of the story is less certain, but potentially far larger in impact.

Speculation has resurfaced about possible changes to the Government Pension Investment Fund (GPIF) asset allocation. GPIF manages roughly 300 trillion yen, which means even a modest shift toward domestic financial assets could have a significant impact on Japanese markets and the yen.

The issue first surfaced in July, when Finance Minister Satsuki Katayama said the government wanted to explore ways to encourage GPIF and other pension funds to invest more in Japanese financial assets. Market interest picked up again after the GPIF board met on Aug. 21, and the later agenda showed discussion of the Basic Portfolio Review Project Team.

The fact that this was reportedly the first August board meeting in about seven years only gave the market more room to speculate.

For now, no one knows whether a meaningful allocation shift will actually happen. The details of the discussions may not be released for months. But markets do not always wait for certainty, especially when the institution in question manages 300 trillion yen.

The mere possibility of capital repatriation to Japan is enough to have an impact.

And it comes at a time when the dollar side of USD/JPY is starting to look less convincing.

The August jobs report was strong, with nonfarm payrolls rising by 162,000, enough to restore some probability of another Fed rate hike. Yet the dollar's reaction was surprisingly muted, which is itself a useful signal. Such a strong payrolls number would normally be expected to push the dollar more decisively higher, especially with the market already discussing a September hike.

Instead, the dollar struggled to build momentum.

Part of the reason is that Fed officials, including Christopher Waller, have made clear they want to see the Sept. 11 CPI before making a final judgment. Wage growth also slowed to 3.1% year-over-year, extending a gradual downward trend and reducing the urgency of the argument that the labor market is generating a new round of inflationary pressure.

So the payrolls data strengthened the case for a hike, but did not seal it.

CPI still holds the decisive vote.

President Trump has also been pushing hard in the opposite direction, calling for lower rates and threatening illogical Trumpian measures if the Fed refuses to cut. With the current data, a cut at next week's meeting would be very hard to justify, but the political message is clear enough: the White House does not want another round of tightening.

That has helped cap the dollar; meanwhile, Japan-specific factors have started to favor the yen, which is why this move feels different from previous intervention-driven rebounds.

The pressure is now coming from both ends of the pair: Japan is becoming more hawkish, or at least being perceived that way by the market; and the dollar is losing support from one of its previously strongest arguments.

From a technical standpoint, the break below 155 is significant because USD/JPY also fell below the 38.2% retracement of the rally from the April 2025 low above 139.50 to the July 2026 high just below 164. That puts the January low below 152.50 and the 50% retracement zone above 151.50 into view.

If long USD/JPY positions built around the old carry mechanism continue to unwind, the pair has room to fall further.

Unless USD/JPY can quickly recover above 155, the market may start to treat old support as new resistance. That would be a meaningful shift, but it still would not automatically equate to a full trend reversal.

Much of what has driven the recent yen move rests on expectations that have not yet been fully tested: a faster BOJ, a less reflationary Japanese policy mix, possible GPIF repatriation, a Washington preference for a stronger yen, and no material shift by the Fed toward a more hawkish stance.

So the third attempt finally broke 155, and that deserves attention.

But the bigger question is: did the market just kick down a stubborn technical door, or is Japan really starting to change the policy architecture on the other side? In the foreign exchange market, those are two very different trades.