Why is the Japanese yen rallying today?

The Japanese yen firmed sharply against the dollar on Thursday, with the USD/JPY pair sliding 0.7% to 157.6 yen amid a sharp pivot in Bank of Japan policy expectations.

Markets bet that a rate hike was imminent, especially after BOJ Governor Kazuo Ueda hinted that the central bank will discuss higher rates and inflation when it meets in mid-September.

The hawkish BOJ tone was reinforced by diplomatic pressure from Washington. U.S. Treasury Secretary Scott Bessent met with Finance Minister Satsuki Katayama, where they agreed to coordinate efforts for "orderly" yen moves, while Governor Ueda signaled that policymakers need to pay greater attention to upside price risks when conducting monetary policy.

Adding further weight, BOJ board member Hajime Takata, one of the bank’s most hawkish members, left the door open for an outsized interest-rate increase as well as back-to-back hikes.

On the macro front, rising Japanese government bond yields amplified yen demand through capital repatriation. The 10-year JGB yield has reached 3%, and markets are increasingly focused on whether Japanese policy can take over from direct currency support, with Natixis and MUFG backing a September BOJ hike.

Meanwhile, markets are pricing in a 67% chance of a September Fed rate hike — a dynamic that, while supportive of the dollar in isolation, has been overshadowed by the scale of the BOJ’s hawkish shift.