TOKYO--Just over a month after joint currency interventions failed to pull the yen significantly off multi-decade lows, shifting policy expectations have triggered a remarkable turnaround.

The yen has now strengthened to near seven-month highs against the dollar as a sharp repricing of the Bank of Japan's rate trajectory--fueled by domestic price pressures, hawkish signals from policymakers and implicit backing from Washington--cemented bets on more monetary tightening.

Here's a rundown of what happened:

Joint Action: A wide U.S.-Japan yield differential has generated selling pressure on the yen for years, making it appealing for carry trades-in which investors borrow a cheap currency to buy higher-yielding assets.

In late July, the yen reached its weakest levels in 40 years at around 164 against the greenback, amplifying imported inflation risks and rattling bond markets already spooked by the energy shock caused by the Middle East war.

The depreciation triggered a historic response: the first coordinated U.S.-Japan yen-buying operation since 1998. Even after that, the yen hovered near the 160 threshold due to factors including slim prospects for a rapid rate-gap narrowing and concerns over Japan's fiscal health.

Tide Shift: The yen is now rallying, briefly touching the 152 mark earlier this week for the first time since February. Momentum has turned as market participants become more convinced of BOJ hawkishness and less certain about the Federal Reserve's rate path near term.

Traders have dramatically repriced BOJ expectations, now almost fully counting on a rate hike at the Sept. 17-18 meeting and assigning high odds to another by year's end.

BOJ policymakers have continuously signaled concern over inflationary risks. Last week, Hajime Takata, who voted for a rate hike in July, called for "nimble" policy changes. On Thursday, Kazuyuki Masu emphasized the need for further tightening to complete monetary policy normalization.

Peer Pressure: Remarks from U.S. Treasury Secretary Scott Bessent have underpinned the recovery. Bessent said Japan had a "tremendous success in Abenomics," former Prime Minister Shinzo Abe's policy mix of aggressive monetary easing and fiscal spending, adding that the current government "should actually let that run and stop the reflation."

Bessent has been talking about the yen more publicly, making comments viewed as implicit pressure from Washington on the BOJ to raise rates to keep a lid on U.S. bond yields.

"When we intervene with the Japanese yen, I have pretty good insight into what the Japanese, what the Bank of Japan's going to do, what Japanese policymakers are going to do," he said this week. "You can bet against me if you want."

Carry Trade: Hawkish BOJ policy alongside potential Fed inaction could trigger a further reversal of short-yen bets. Still, it might be too early to conclude that the yen carry trade has entered a full-scale unwinding, said SMBC Nikko Securities strategist Rinto Maruyama.

"If the yen strengthens further and turns cumulative returns into losses, the unwinding could speed up rapidly. But if the dollar bounces back against the yen, investors might start building up carry trades again," Maruyama said.

In the equities space, a carry unwind would be especially painful for the artificial-intelligence and technology complex, where high valuations and crowded positions make conditions ripe for a selloff, said Swissquote's Ipek Ozkardeskaya. In currencies, the Australian dollar looks particularly vulnerable due to its popular role in carry trades. The Aussie-yen pair would probably be one of the major casualties if an unwind unfolds, she said.

Will it Stick? Whether the yen's rebound will last is up for debate. Some are doubtful.

BOJ rate hikes are likely to be gradual, as sharp tightening could damage economic growth and the central bank's balance sheet, Sony Financial Group chief analyst Maki Ogawa said. "The Fed is also expected to embark on rate hikes next year, making it unlikely that the U.S.-Japan interest-rate differential will narrow dramatically."

She projects the dollar to trade between 150 and 165 yen over the medium term.