USD/JPY drops to 156.4 on yen repatriation flows and Fed remarks

Flows tied to the end of Japan's fiscal half-year are the main driver, and such moves can reverse once the new half begins, so the yen's appreciation may be less lasting than the size of the drop suggests. Official remarks have made traders cautious about pushing USD/JPY higher, and the pair was near the top of its recent range before the decline. The Fed's Williams saying there is no urgency for another hike removed some dollar support, though US yields remain high and hike expectations are still strong. The Bank of Japan's policy path is the other swing factor, with the market debating whether it will move again in October.

The yen strengthened because Japan's fiscal half-year end prompted heavy repatriation flows, aided by cautious Fed commentary and official comments that capped USD/JPY.

A summary of the day's moves:

• USD/JPY dropped from about 157.5 to about 156.4 in Asian trade Wednesday, a fall of roughly 0.7%, and other yen crosses also declined.
• Before the fiscal half-year end on September 30, Japanese investors and exporters sold foreign currencies.
• The selling persisted after the Tokyo fix, the daily reference rate set mid-morning.
• Remarks from Japanese and US officials late last week and early this week helped contain the pair.
• Fed's John Williams said Tuesday there is no urgency to raise rates again, though he said one more increase may be appropriate late this year.
• The yen rose despite Japan's August industrial output falling 1.7% month-on-month and retail sales growth slowing.

The yen gained in Asian trade Wednesday, with USD/JPY declining from around 157.5 to around 156.4 and other yen crosses also dropping. The roughly 0.7% move was mainly attributed to flows tied to Japan's fiscal half-year end on September 30, as Japanese investors repatriated funds and exporters sold foreign currencies. The selling continued after the Tokyo fix, the daily reference rate set mid-morning that is a focal point for corporate flows.

Official commentary also helped cap the pair. Market commentary pointed to remarks from Japanese and US officials late last week and early this week, and FXStreet reported that President Donald Trump's concern about the yen's weakness spurred speculation of another joint US-Japan intervention. USD/JPY had been consolidating around 157.5 on Tuesday after bouncing from a one-week low, with a hawkish Bank of Japan also underpinning the yen.

The Federal Reserve contributed to the dollar's softer tone. New York Fed President John Williams said Tuesday there is no need for urgency after the central bank's September rate hike, though he said one more increase may be appropriate late this year if the economy matches his forecast. FXStreet characterized the remarks as dovish and said they nudged the US dollar index modestly lower, although the index stayed positive for the day. Other Fed officials leaned more hawkish, with Governor Michael Barr saying further increases are likely necessary, and money markets still see a strong chance of a hike at the October meeting.

The yen's gain came despite weak domestic data. Japan's August industrial output fell 1.7% from the previous month against a forecast for a 1.7% rise, and retail sales grew 2.7% from a year earlier, below the 3.3% expected. Those results would ordinarily weigh on the currency by complicating the case for tighter policy, which suggests flows rather than fundamentals are driving the move. The Bank of Japan raised its policy rate to 1.25% in September, the highest since 1995, and a former BoJ executive director put the chance of another increase in October at 20% to 30%.

Traders are likely to watch how the pair behaves once the new fiscal half-year begins on Thursday, as repatriation flows of this kind can fade quickly. Further official comments from Tokyo and Washington, US data and the next steps from the Fed and the Bank of Japan remain the key swing factors.