Summary
Japan's FX intervention since the end of July has reached JPY15.4tn, while Japan and the US have signaled that they remain prepared to intervene jointly again. This has helped contain yen weakness to some extent. A September hike is now largely priced in as markets increasingly view BOJ rate hikes as part of the quid pro quo for US support. However, it remains unclear whether the government would accept a rapid series of rate hikes toward the neutral rate, and fiscal concerns are also likely to weigh on the yen. In the US, hawkish remarks from Fed Chair Kevin Warsh have revived expectations of a September rate hike, but such expectations could still recede depending on the employment and inflation data. Japan's trade deficit remains a source of yen weakness, but the impact of intervention, more stable oil prices, and the prospect of further BOJ rate hikes make an accelerating yen-depreciation spiral like that seen in 2022 less likely. Looking ahead, attention should focus not only on US and Japanese monetary policy, but also on potential G20 coordination over currency policy toward China.