The dollar fell over 2% against the yen on Thursday, marking its steepest one-day decline since U.S. and Japanese authorities intervened in the currency market in late July.
It did so even with futures markets assigning better-than-even odds to a Federal Reserve rate increase in less than two weeks.
The reason it stopped working has nothing to do with Washington. The interest rate gap that has powered the yen carry trade for four years is finally closing on the Tokyo side.
USD/JPY was trading at 155.48 at 10:05 a.m. ET Thursday, down 2.03% from Wednesday’s close of 158.70, with a session low of 155.40.
The ICE US Dollar Index – as closely tracked by the Invesco DB USD Index Bullish Fund ETF (NYSE:UUP) – was down 0.58% at 99.018
Yen Spike Sparks Intervention Chatter
The yen touched 156.15 per dollar intraday, its strongest level since Aug. 3. That followed a roughly 1.2% jump on Wednesday.
Two moves of that size in a day and a half, in a pair that had crossed 160 earlier this week, is exactly the pattern that gets desks asking whether the Ministry of Finance was in the market again.
Japan spent a record 15.4 trillion yen, about $98 billion, supporting its currency between July 30 and Aug. 26, according to finance ministry data.
The U.S. Treasury separately confirmed it used foreign-currency holdings to buy yen in late July.
Japan’s Vice Finance Minister for International Affairs Atsushi Mimura said Thursday that authorities were neither satisfied nor reassured by recent moves and remained on heightened alert.
The Rate Gap Is Closing From Tokyo’s Side
This is the part that actually matters for the pair.
The 10-year Japanese government bond yield sits at 2.967% after touching 3% for the first time since 1996 this week.
The two-year JGB yield, the maturity most sensitive to policy, is at 1.855%, a fresh 12-month high and a level unseen since 1995.
The 30-year yield eased 8 basis points to 4.086% after a solid auction Thursday, having set a cycle high of 4.21% on Wednesday.
Set that against 4.754% on the 10-year Treasury and the US-Japan gap is down to roughly 179 basis points.
That’s near the lowest seen since 2022.
The BoJ has its policy rate at 1.00% after the June 16 hike, the highest since 1995, and board member Hajime Takata said this week the bank should move nimbly rather than at a fixed semiannual pace.
Overnight index swaps have effectively fully priced a hike at the Sept. 15-16 meeting.
Bank of America Sees 149 By Year-End
Bank of America FX strategist Shusuke Yamada said the bank is now “short USD/JPY.”
“We recommend selling USD/JPY at 159.70, targeting 149.0” with a stop at 164.0, Yamada said in a note on Thursday.
Yamada said Japan has run the largest basic balance surplus of any major economy since spring 2025 and has seen the second most hawkish policy repricing after the Australian dollar, yet the currency kept weakening.
He attributed that to yen-selling hedges from foreign investors riding Japanese equity outperformance, a flow he said gets far less attention than the policy-risk story, leaving that narrative stretched relative to reality.
He said markets now price the BoJ at 2% by July 2027 and that nearly 70% of respondents to the bank’s investor survey believe the yen will stabilize at that level.
Crucially, Yamada said the risk-reward stays skewed to the downside even if the Fed hikes, because authorities are unlikely to tolerate a move beyond 160, because any further coordinated operation would need a larger U.S. contribution to stay credible, and because higher rates hitting the AI-driven equity rally would trigger yen buying through hedge unwinds.
Yamada also named persistently elevated oil as the main threat, saying Brent crude holding in the mid-$90s or above would deteriorate Japan’s trade balance and undermine the bullish yen case.
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