The Japanese yen strengthened for a second straight session on Thursday, staging a sharp reversal of its month-long gradual decline as traders weighed fresh intervention warnings from Tokyo and Washington alongside growing expectations for another Bank of Japan rate increase.

The currency climbed as high as 156.36 per dollar during the session, notching a 1.5% daily gain — its strongest performance in roughly a month since US and Japanese authorities last intervened in markets jointly.

Japan's Finance Minister Satsuki Katayama and US Treasury Secretary Scott Bessent each signaled they would not hesitate to step back into currency markets if needed. Meanwhile, the Bank of Japan is leaning toward a 25-basis-point hike at its upcoming meeting, a move that has tempered speculation of an even larger increase.

Adding to the picture, reports indicated that BOJ account data showed no major intervention on Wednesday. A 30-year Japanese government bond auction on Thursday drew bid-to-cover of 3.79, above the 12-month average of 3.52 and better than the "soft-to-moderate" outcome markets had widely expected.

With both the Federal Reserve and BOJ policy decisions looming and Japan's "Silver Week" holiday stretch approaching, market sentiment remains highly strained. Analysts warn that should the dollar-yen pair revisit the 160 level, the risk of a fresh round of intervention rises considerably.

Dual catalysts fuel yen rally, reversing month-long slide

The core logic driving the yen's rebound centers on a repricing of BOJ rate expectations and sustained vigilance over possible official intervention.

BOJ board member Hajime Takata said Wednesday that a 25-basis-point increase was "not set in stone" and that back-to-back hikes remained theoretically possible, reinforcing market bets on a more aggressive central bank stance. Interest rate swaps now nearly fully price in a 25-basis-point move this month, with probabilities of a follow-up hike in December also steadily climbing — a faster tightening path than previously anticipated.

Hideaki Minami, head of spot FX trading at Mizuho Bank, noted that "yen buying appears to be coming particularly from overseas investors, driven by speculative bets on a larger rate hike. However, it is too early to conclude from today's move alone that the yen's depreciation trend has reversed."

Record intervention fails to stem pressure; 160 remains flashpoint

Despite Japan spending a record amount — reported at $964 billion over the past month — to support the yen, persistently elevated oil prices and widening US-Japan yield differentials continue to weigh on the currency. The latest intervention round, backed by US coordination, has sent a stronger warning signal to speculators.

Looking at recent tactics, Japanese authorities chose to act during a domestic holiday period back in April. Markets now speculate they may replicate that strategy by intervening again during the "Silver Week" holidays that directly follow the BOJ meeting, when thinner liquidity could amplify the effect of any action.

Samara Hammoud, strategist at Commonwealth Bank of Australia, said "Silver Week raises yen uncertainty, mainly because liquidity thins out during the holiday period. As time passes, the probability of dollar-yen retesting pre-intervention highs is elevated. If that happens quickly around the BOJ meeting, the risk of fresh intervention rises substantially."

Bart Wakabayashi, Tokyo branch head at State Street, also observed that "after any sharp move, the first question on the trading desk is always 'was that intervention?' The market will remain highly sensitive and alert."

Fed stance adds variables; yen faces multiple hurdles

Investors are also closely watching the Federal Reserve's upcoming policy meeting, scheduled just days before the BOJ decision. Fed Chair Kevin Warsh warned at the Jackson Hole symposium in Wyoming that inflation has not shown meaningful progress and that policymakers must maintain confidence, suggesting the Fed "still has work to do" — a signal that monetary policy may stay on a tightening bias.

Bessent's increasingly public pressure on Japan to raise rates also makes the BOJ meeting a particularly acute market risk. Bloomberg Markets strategist Mark Cranfield noted that if the BOJ fails to respond to Bessent's nearly explicit push for hikes, traders would be caught off guard and the yen could plunge sharply. He also pointed out that sustaining yen strength through a week encompassing both the Fed and BOJ decisions would be extremely difficult, likely requiring a surprise dovish pivot from the Fed and a clear signal of consecutive hikes from the BOJ — a combination with limited probability.

Marito Ueda, president of SBI FX Trade, said "the market is on high intervention alert heading into the Fed-BOJ meeting window, compounded by Japan's holidays. If dollar-yen returns to the 160 zone, intervention is entirely possible."