The yen soars against the dollar and rekindles carry trade fears

Six weeks. This is how long it took for the yen to go from being a zombie currency to becoming a star of the trading floors. At the end of July, the Japanese note flirted with its lowest levels in forty years against the dollar. This Monday, September 7, it climbs to 154 yen per dollar, its highest level since February. A reversal of rare brutality, which revives a concern well known to readers of Journal du Coin: that of the carry trade (borrowing in yen at almost zero interest to invest elsewhere) which is resolved in haste.

On July 29, the dollar peaked at 163.9 yen. Tokyo and Washington then brought out the heavy artillery: a joint intervention on the foreign exchange market, confirmed by US Treasury Secretary Scott Bessent, who promised to “not hesitate to participate in new joint interventions” in the event of disorderly movements. The greenback fell to around 156.5 yen that day. And he hasn't stopped going backwards since.

At the beginning of September, the acceleration surprised everyone. On Wednesday, the yen gained 0.9% against the dollar. The next day, another 1%. This Monday, the USD/JPY pair touched 154 yen, a six-month low for the greenback. Enough to make funds that have been betting for years on an eternally weak yen nervous: the rise takes them on the wrong foot.

The real fuel of this rally is not so mysterious. The markets have revised their expectations for the Bank of Japan upwards. Takuji Aida, economic advisor to Prime Minister Sanae Takaichi and chief economist at Crédit Agricole, said this Monday, September 7, that the institution will probably raise its rates at its meeting on September 17 and 18. It would then continue at the rate of an increase every three months until January 2027, before returning to a six-monthly rate, according to comments reported by Reuters. Aida himself warns that this accelerated pace would weigh on the Japanese economy.

The paradox is obvious. Takaichi herself is known for her dovish leanings: she is pushing a two-year suspension of the 8% tax on food products, financed on credit. His own advisor is banking on monetary tightening, on the eve of an extraordinary parliamentary session in October where this tax suspension must precisely be debated.

For crypto players, the story has a taste of déjà vu. In August 2024, a surprise increase from the Bank of Japan was enough to cause the price of bitcoin to melt from $62,000 to $49,000 in a few days, with positions financed in zero-rate yen unwinding in panic. According to CoinDesk, the correlation between bitcoin and the dollar/yen pair has even reached -0.90 over the last twelve months, a figure which above all betrays the sensitivity of BTC to the dollar more than to the yen itself.

For now, the scenario is not repeating itself. At the beginning of September, bitcoin was trading around $80,000, driven by the general weakening of the greenback rather than weighed down by it. Gold climbed in the same movement. But the mechanics remain fragile. A more brutal rate increase than expected on September 18 could force many funds to suddenly unwind their bets financed in cheap yen, including cryptos.