In the unexpected interest rate hike by the Bank of Japan, coupled with the hawkish tone of Kazuo Ueda, the yen soared like a rocket, soaring nearly 300 points to 149.60 yesterday. On Thursday (August 1), this crazy upward trend continued, reaching 148.50 at one point, and some investment banks even boldly rose to the 140 level.

In the intense trading of the past 24 hours, the Japanese yen has achieved its best monthly performance in a year and a half, with a surge of over 1000 points in July. Strategists from Amundi and TD Securities expect the USD/JPY to strengthen to the 140 level.

A colleague from Macquarie stated that 'this strong yen rebound is just beginning', and the US dollar against the yen may approach 140 by the end of the year and reach 125 by December 2025. This will return to the level of early 2022, when the Federal Reserve had just started raising interest rates.

Although some strategists believe that the yen may give up most of its recent gains in the near future, the Bank of Japan's interest rate hike on Wednesday and signals from the Federal Reserve about a rate cut have dispelled the pessimistic sentiment that has been hanging over the yen for months.

If we see a series of factors: the start of the Federal Reserve's easing cycle, increased risk aversion, and the Bank of Japan maintaining a firm tightening stance, the yen may reach 140, "said Paresh Upadhyaya, head of fixed income and monetary strategy at Amundi in the United States." Although this may seem like a daunting obstacle, it is not actually

At around 11:30 Tokyo time on Thursday, the Japanese yen traded around 149.60 against the US dollar, previously rising to 148.501. On Wednesday, it rose about 1.8%, expanding its monthly increase to over 7%.

This is in stark contrast to the first half of this year, when the Japanese yen fell 12% and performed the worst among the G10 currencies, forcing Japan to enter the market to support the yen in April and May. At that time, Japan spent 9.8 trillion yen (65.4 billion US dollars), and last month spent another 55000 billion yen, finally reversing the situation.

Japan's monetary policy tightening will strengthen the feedback loop towards rebalancing local assets, "said Alex Loo, macro strategist at TD Securities, which expects the US dollar to reach 140 against the Japanese yen in the first quarter of next year.

Charu Chanana, the head of currency strategy at Saxo Markets, stated that the Japanese yen is expected to strengthen below 145 this year, especially with increased volatility and the closure of carry trades.

The Federal Reserve is expected to cut interest rates, while we expect the Bank of Japan to raise interest rates to 0.75% next year, "said Shusuke Yamada, head of Japan monetary and interest rate strategy at Bank of America. He expects the Japanese yen to trade in the 140 range.

MLIV strategist Sebastian Boyd said, "If the only factor affecting the yen is US Japan interest rate expectations, the yen is still cheaper than it should be. There is still more room for the yen to rise from its current level, and the model shows that its trading level should be much higher than it is currently

Macquarie's Gareth Berry believes that with the collapse of common short selling yen carry trades, the yen will strengthen significantly.

Over time, the upcoming easing cycle of the Federal Reserve should weaken the significance of short selling the yen as a foreign exchange carry trade, "the Singapore based currency and interest rate strategist wrote in a report.

In the past month, the Japanese yen has strengthened against all major currencies - in stark contrast to the situation on July 3rd when it approached a 38 year low. Hedge funds drove this rebound after aggressively withdrawing from short selling the Japanese yen to buy high-yield peers such as the Mexican peso.

Despite strong expectations of further narrowing the interest rate gap in Japan, investors still need to deal with a series of risks, including the US election and the policy paths of the Bank of Japan and the Federal Reserve.

Japan's borrowing costs are still much lower than the United States at around 0.25%, and the Federal Reserve maintained the federal funds rate in the range of 5.25% to 5.5% on Wednesday. However, swap traders expect the United States to cut interest rates at least twice this year, with the first one likely in September.

The Japanese yen is unlikely to continue to appreciate

Not everyone is optimistic about the Japanese yen. Some investors expressed before the Bank of Japan meeting that even with interest rate hikes, the yen still has reasons to maintain its advantage in carry trades.

According to abrdn, once market volatility weakens, it may fall back to the 155 level.

Without a recession in the United States or a more moderate Federal Reserve policy than expected, it is unlikely that the yen will continue to appreciate, "said David Zhou, Investment Director of Abradn Multi Asset Investment Solutions." Even if the probability is favorable for the yen to strengthen

Tohru Sasaki, Chief Strategist of Fukuoka Financial Group Inc., also does not believe that the strength of the yen will continue. Although the currency may strengthen in the short term, it may weaken again to the 160 level when attention returns to interest rate differentials and economic fundamentals.

If the real interest rate remains significantly negative and has not turned positive, I believe that even in the medium to long term, the yen is unlikely to appreciate, "he said.

But for many people, the Bank of Japan's policy decision on Wednesday after the first rate hike in March has changed the outlook for the yen.

The Bank of Japan has stated that if the economic outlook is realized, it will 'continue to raise policy rates accordingly,' "wrote Carol Kong, a monetary strategist at the Commonwealth Bank of Australia, who expects the yen to trade at 145 levels in the fourth quarter of next year. This is a hawkish change compared to the moderate wording in the March statement.