Yen Between BoJ, Fed and a Bond Market Shock

The yen enters the final week of August in a stronger position than at its previous lows, but its recovery has yet to develop into a structural appreciation trend.

On 24 August 2026, at 5:00 p.m. Tokyo time, USD/JPY was quoted at 159.15-159.17, while EUR/JPY stood at 185.67-185.71. The Japanese currency therefore retained part of the gains generated by the intervention at the end of July, although USD/JPY’s return towards 160 demonstrates that the yield differential continues to favour the dollar. 

The future direction of the JPY will depend primarily on four variables: the pace of Bank of Japan rate increases, the Federal Reserve’s restrictive policy, developments in Treasury and JGB yields, and the willingness of the United States and Japan to counter renewed disorderly exchange-rate movements.

BoJ Holds at 1%, but Tightening Cycle Continues

On 31 July, the Bank of Japan kept its overnight interest rate at 1%, with an eight-to-one majority. Board member Hajime Takata proposed an immediate increase to 1.25%, arguing that inflationary risks arising from global demand and international financial conditions required a faster response. 

The decision not to raise rates again does not amount to an indefinite pause. In the subsequent Summary of Opinions, several members indicated that:

• Underlying inflation is approaching 2%;

• Japan’s financial conditions remain accommodative;

• Short-term real interest rates are still negative;

• The BoJ should continue raising its policy rate;

• The pace of increases could prove faster than markets expect.

The central bank nevertheless intends to assess the impact of its previous tightening, considering that a rate increase may take between 12 and 18 months to affect economic activity and inflation. The message is therefore restrictive but gradual: policy normalisation will continue unless economic growth deteriorates significantly. 

This policy stance is supportive of the yen because it progressively narrows the gap with other economies. However, as long as Japan’s policy rate remains substantially below the US rate, the JPY will continue to be used as a funding currency in carry-trade strategies.

Fed Holds Rates, but Three Members Vote for a Hike

The Federal Reserve maintained the federal funds rate within its 3.50%-3.75% target range. The decision was approved by nine votes to three: Beth Hammack, Neel Kashkari and Lorie Logan would have preferred an immediate 25-basis-point increase.

The minutes released on 19 August show a Fed still concerned about inflation remaining above its target, partly because of energy-related supply shocks. At the same time, US economic activity was described as expanding at a solid pace, with robust investment and productivity and a broadly stable labour market. 

The combination of persistent inflation, continued economic growth and three dissenting votes in favour of a hike reduces the probability of rapid monetary easing. Before the meeting, markets were already pricing in a rate increase by September and a second move by the first quarter of 2027.

This represents the main obstacle for the JPY. If the Fed raises rates again while the BoJ proceeds more cautiously, the widening yield differential would renew the incentive to buy dollars against yen.

US Treasury Yields Remain Very High

On 21 August, the official yield on the two-year US Treasury stood at 4.24%, while the five-year yielded 4.43% and the ten-year 4.74%. At the long end of the curve, the 20-year Treasury yielded 5.25% and the 30-year 5.27%.

Compared with 31 July, the ten-year yield was virtually unchanged, moving from 4.75% to 4.74%, while the 30-year yield remained at 5.27%. The curve therefore continues to reflect not only high policy rates but also significant inflation, duration and debt-supply premia. 

These levels have three consequences for the yen.

First, they keep the USD/JPY carry trade highly profitable. Second, they make US securities attractive to Japanese investors, particularly when currency exposure is not fully hedged. Finally, such high US yields support the dollar even as the BoJ gradually increases its own policy rate.

The picture would change if a US economic slowdown caused Treasury yields—especially at shorter maturities—to decline materially. In that scenario, the yield differential would narrow and the unwinding of carry-trade positions could accelerate the yen’s appreciation.

JGBs: Normalisation Spreads Across the Yield Curve

Japanese bond yields have also increased significantly. On 20 August, Japan’s Ministry of Finance placed 20-year JGBs at an average yield of 3.698%, with the highest accepted yield at 3.713%. On 24 August, the auction of ten-year Climate Transition JGBs closed with a maximum accepted yield of 2.863%. 

The rise in yields reflects both the BoJ’s rate increases and the progressive reduction of its government-bond purchases. The central bank continues to buy JGBs, but in smaller volumes than in the past, allowing market forces to play a greater role in determining prices.

Rising Japanese yields are structurally positive for the JPY because they improve the attractiveness of domestic assets and reduce the incentive to export capital. However, the effect is not linear.

An orderly increase in JGB yields, accompanied by wage growth and economic expansion, tends to support the yen. An excessively rapid rise in long-term yields, however, could generate losses in bond portfolios, financial stress and concerns about public-debt sustainability. Under this second scenario, the BoJ might be forced to slow policy normalisation, limiting the benefit for the currency.

Coordinated Intervention Creates a New USD/JPY Ceiling

The factor distinguishing the current phase from previous periods is coordinated foreign-exchange intervention.

Japan’s Ministry of Finance confirmed that it purchased yen together with the US Department of the Treasury on 31 July. The operation was intended to counter excessive volatility and disorderly market movements. Tokyo also stated that it was prepared to conduct further joint intervention and planned to use the Federal Reserve’s Foreign and International Monetary Authorities Repo Facility in the future. 

This confirmation changes the market’s perception of risk. A unilateral Japanese intervention can be absorbed if the interest-rate differential remains very wide. A coordinated operation with the United States carries greater credibility and makes it riskier to accumulate speculative positions beyond certain exchange-rate thresholds.

Intervention alone cannot create a lasting appreciation of the yen, but it can limit the pace of depreciation and trigger violent short-covering in the JPY.

Growth Slows in Both Economies

US real GDP increased at an annualised rate of 1.5% in the second quarter, slowing from 2.1% in the first quarter. Private domestic demand remained robust, but the gross domestic purchases price index rose by 5.7% and the PCE price index by 5.1%. 

These figures complicate the Fed’s task: growth is slowing, but price pressures do not allow for rapid monetary easing. In the short term, this combination keeps US yields elevated and supports the dollar.

The BoJ expects the Japanese economy to continue growing moderately in 2026, although at a slower rate. Demand linked to artificial intelligence, government measures and wage increases should partially offset the negative impact of higher oil prices.

Japan’s headline inflation stood at 1.9% in July, while the BoJ expects the CPI excluding fresh food to accelerate clearly above 2% from the second half of fiscal 2026. Oil, semiconductors, AI-related demand and the yen’s previous weakness represent the principal upside risks. 

Spillover Effects Between the United States and Japan

The relationship between the two markets operates through several channels.

When Treasury yields rise faster than JGB yields, the widening differential favours the dollar and weakens the yen. A weaker JPY, however, increases the cost of Japan’s energy imports, fuels inflation and pushes the BoJ towards additional rate increases.

At the same time, higher JGB yields may encourage Japanese institutional investors to repatriate some of the capital held in the United States. If this movement became significant, it could reduce marginal demand for Treasury securities and help keep US yields elevated.

This creates a potentially unstable feedback loop: high US yields weaken the yen; a weaker yen increases Japanese inflation; the BoJ raises rates; JGBs become more competitive; and Japanese capital may return home, exerting pressure on Treasury securities.

JPY Outlook: A Fragile Balance Near 160

The short-term picture remains balanced. The JPY benefits from a BoJ inclined towards further rate increases, higher domestic yields and the credible threat of renewed joint intervention. The dollar, however, retains the advantage of a policy rate approximately 250-275 basis points higher and a highly remunerative Treasury yield curve.

For USD/JPY, 160 remains the central psychological threshold. A sustained move above this area would indicate that the yield differential is again prevailing and could reopen the path towards 162-164, although it would also increase the risk of intervention.

A stable decline below 157-158 would instead strengthen the yen-positive scenario. Below 155, carry-trade unwinding could turn the movement into an acceleration towards 152-150.

Over the medium term, the decisive variable will not be a single foreign-exchange intervention, but the relative speed of the two central banks. A faster BoJ combined with a Fed constrained by slowing economic growth would represent the most favourable combination for the JPY. A still-restrictive Fed and a cautious BoJ would instead keep USD/JPY structurally elevated.

The information is updated to 24 August 2026 and comes exclusively from institutional sources. Forward-looking assessments represent economic inferences based on the available official data and are not statements issued by the cited authorities.