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Why the Bank of Japan may be praying for a Fed rate hike

The national flag flutters in the wind at the Bank of Japan headquarters in Tokyo.
Kazuhiro Nogi | AFP | Getty Images

The Bank of Japan has lost its grip on the country's currency, and an interest rate hike from the U.S. Federal Reserve may be the only fix for Japan's economy.

Overnight, the yen hit 100.07, its strongest against the dollar in nearly a month. The strength comes after the Bank of Japan took the new and unusual step of implementing so-called "yield curve control", a policy that's designed to keep the 10-year Japanese government bond yield near current levels, around 0 percent. Most bonds issued by Japan have negative yields — meaning that bond buyers actually pay for the right to lend money to the government.

"It's a sign again for me they're running out of policy options," said Lee Ferridge, head of macro strategy, North America, at State Street Global Markets.

The yen has persistently strengthened against the dollar all year, despite the Bank of Japan's move in January into negative rates. Loose U.S. monetary policy that has kept the dollar soft, and shocks such as the surprise U.K. vote to leave the European Union, have pushed the yen higher as well. The Japanese currency has climbed more than 15 percent against the greenback so far this year and made export giant Toyota cut its operating profit forecast by a stunning 1.12 trillion yen ($11.1 billion) for the current fiscal year.