On Monday (August 24) during Asian trading hours, the USD/JPY pair fluctuated slightly lower, remaining below the 160 level. It initially fell to around 158.54, marking its second consecutive day of decline, and is currently trading around 158.90. Japanese inflation data accelerated for the second consecutive month, with core CPI rising 1.8% year-on-year in July, strengthening market expectations for a September rate hike by the Bank of Japan and providing support for the yen. Meanwhile, the US Treasury's expansion of its long-term debt repurchase program continued to weigh on the dollar, with Treasury Secretary Bessenter hinting that the repurchase program could exceed $4 billion per period. However, the dollar's downside may be limited—escalating geopolitical tensions between the US and Iran provided safe-haven buying support for the dollar, with the Iranian Foreign Minister calling US sanctions a "desperate measure" and the Iranian security chief warning of "earthquake-like" retaliation.

Inflation data reinforces expectations of interest rate hikes, providing support for the yen.

The dollar extended its losses against the yen in Asian trading, declining for the second consecutive day and trading around 158.90. Japanese inflation data accelerated for the second consecutive month, with core CPI rising 1.8% year-on-year in July, in line with expectations and up from 1.6% in June, further solidifying market expectations for a Bank of Japan rate hike in September. Scotiabank strategists noted that the latest Japanese inflation data "marginally strengthened confidence in the Bank of Japan tightening policy next month," with the swap market already pricing in a rate hike of approximately 20 basis points. The bank added that "price data helped the yen rise 0.4% against the weaker dollar on the day," highlighting that the market is increasingly aligned with the prospect of a recent tightening of policy by the Bank of Japan.

US Treasury repurchases continued to weigh on the dollar, but geopolitical risks provided support.

Regarding the US dollar, the US Treasury unexpectedly pledged to at least double the size of its long-term debt repurchase program to curb rising yields. Treasury Secretary Bessant hinted that the repurchase program could exceed $4 billion per tranche, aiming to signal that "yields are not reflecting fundamentals." This move continued to suppress the dollar, providing additional support for the yen. However, the dollar's downside potential may be limited by geopolitical risks. Iran's foreign minister stated that the impending US sanctions were a "desperate measure" and would not weaken Tehran; Iran's security chief warned of an "earthquake-like" retaliation if Trump takes further action. The escalating US-Iran standoff provided safe-haven buying support for the dollar, limiting the downside potential of the dollar against the yen.

Institutional Views

HSBC's latest FX outlook forecasts for USD/JPY as follows: Q3 161, Q4 162, Q1 2027 163, Q2 2027 164, with a long-term bullish view. The bank's baseline scenario suggests USD/JPY will primarily trade within a range: temporary intervention by the Japanese Ministry of Finance will limit upside, while Japan's persistently negative real interest rates will provide support. The trading range may widen in the near term due to factors including the US dollar (weaker US data, uncertainty surrounding the new Fed Chair's policy stance, and geopolitical uncertainty) and the yen (joint US-Japan intervention, potential changes in Bank of Japan policy, and adjustments related to the Government Pension Investment Fund and Tax-Free Savings Accounts). HSBC emphasizes that joint intervention could buy time for accelerated interest rate hikes, adjustments to capital flow policies, and fiscal discipline, but if the US-Japan interest rate differential remains wide and fiscal concerns persist, a significant upward trend in the yen is unlikely. Rabobank noted that news of US Treasury Secretary Bessenter's bond buyback program pushed the dollar down, temporarily moving USD/JPY away from the psychological level of 160. Japanese fiscal and debt dynamics, US government spending plans, and changes in demand for long-term government bonds all influence exchange rate movements. Rabobank believes that a more resolute Bank of Japan policy rate, structural reforms, and economic resilience provide a path for the yen to find support in the coming months, but the 2027 budget discussions could significantly impact market sentiment. The US dollar retains its safe-haven status due to its dominant position in the global payments system. Overall, if several factors (improved fiscal outlook, a clearly hawkish central bank, and easing concerns about Fed tightening) fail to materialize simultaneously, the yen's recovery will be limited, and the exchange rate may fluctuate between intervention and fundamentals.

Summarize

The USD/JPY pair fell for the second consecutive day, hovering around 158.90. Japanese inflation data accelerated for the second consecutive month, with core CPI rising to 1.8% in July, reinforcing expectations of a September rate hike by the Bank of Japan and providing support for the yen. Scotiabank noted that the inflation data "marginally strengthened" confidence in tightening policy next month. The dollar was pressured by the US Treasury repurchase program, but geopolitical tensions between the US and Iran provided safe-haven buying support, limiting further downside. Against the backdrop of intertwined inflation data and geopolitical risks, the USD/JPY pair is expected to fluctuate within the 158.00-160.00 range in the short term, awaiting further clarity from the Bank of Japan's September meeting and the trend of US Treasury yields. (USD/JPY daily chart, source: FX678) At 11:14 Beijing time on August 24, the USD/JPY exchange rate was 158.91/92.