The Bank of Japan is set to hold its policy rate at 1% on Friday. Confirmed currency intervention sent the Japanese Yen (JPY) surging against the US Dollar (USD) before partly reversing.

A market source told Reuters that Japan carried out yen-buying, dollar-selling intervention overnight. The move pulled the currency off a 40-year low in its biggest single-day jump since January 2023.

A Yen Rally Already Fading

USD/JPY tumbled from above 163 to below 158 on Thursday. The pair then climbed back to 160.175 in early Friday trading as the intervention effect began to fade.

Still, the reversal shows how quickly currency moves can unwind without follow-through signals from the central bank itself.

Rodrigo Catril, senior FX strategist at National Australia Bank, said the timing suited Japan’s weaker dollar and calmer risk sentiment.

“If you want to kind of intervene, it’s probably quite a good time.”

Rodrigo Catril, National Australia Bank

The Bank of Japan raised its policy rate to 1% in June, the highest level in 31 years. Analysts expect Friday’s meeting to hold that rate while striking a hawkish tone. A Reuters poll points to another hike, to 1.25%, by year-end.

The Fed’s Hold Adds Pressure

The Federal Reserve also held rates steady Wednesday, its fifth straight pause. Traders questioned the central bank’s resolve on inflation, weakening the dollar broadly. That adds pressure on Kazuo Ueda, the Governor of the Bank of Japan (BOJ), to sound convincingly hawkish.

The US Dollar Index (DXY) fell 0.7% in the previous session, Reuters reported. The index was on pace for a 1.5% weekly drop.

That broader dollar weakness narrows the gap between the Fed’s benchmark rate and the BoJ’s 1% level. Traders use that spread to fund the yen carry trade, borrowing cheap yen to buy higher-yielding dollar assets.

The strategy only works if the rate gap holds and the yen doesn’t strengthen too quickly. A narrower gap or a stronger yen could unwind those trades fast, adding another reason to watch Ueda’s tone closely.

Source: BeInCrypto