1,694 Hawkish Warsh Tone Weighs on Japanese Yen

The Japanese Yen remained near one-month lows during trading on Monday, August 31, 2026, despite a brief, slight strengthening to below 160 against the US dollar. The USD/JPY pair hovered around 159.8, with the yen having weakened approximately 1.7% over the past month. Pressure stemmed primarily from a strengthening dollar following hawkish comments by Federal Reserve Chair Kevin Warsh, which heightened expectations for a US interest rate hike in September.

Markets now price in a roughly 57% probability that the Fed will raise interest rates by 25 basis points next month. These expectations pushed the yield on two-year US Treasuries up to around 4.33%, maintaining a wide yield gap between US and Japanese assets. This dynamic keeps the dollar more attractive to investors and serves as a primary driver of pressure on the yen.

In Japan, markets are increasingly betting that the Bank of Japan (BOJ) might raise interest rates again in September to counter the yen's weakness and the risk of imported inflation. However, the yen has surrendered more than half of the gains achieved following joint intervention by Japan and the US in late July. Concerns regarding Japan's fiscal health also continue to weigh on the currency.

Rising oil prices add further pressure, given Japan's heavy reliance on energy imports. A fresh escalation in the US-Iran conflict has pushed Brent crude back toward US$90 per barrel, increasing the risk of higher import costs and inflation for Japan. While higher inflation could prompt a more hawkish stance from the BOJ, in the short term, rising energy costs could worsen the trade balance and weigh on the yen. (CP)