The Japanese yen continues to decline against the U.S. dollar, falling through the 160 level to reach its lowest point this year. This increases the risk of potential market intervention by Japanese authorities. The persistent depreciation of the yen is deepening concerns among the country's policymakers.
Earlier this week, Japan's Finance Minister Shunichi Suzuki stated that authorities are on high alert against speculative moves in the foreign exchange market and are prepared to respond to currency fluctuations around the clock. The yen has been under sustained pressure since the Bank of Japan's monetary policy meeting in April, where Governor Kazuo Ueda did not provide clear signals regarding the timing of the next interest rate hike.
Following the conclusion of the U.S. Federal Reserve's policy meeting on Wednesday, the yen fell approximately 0.5% against the dollar to 160.47, marking a new low since mid-2024. As of the latest update, the exchange rate stands at 160.29. In 2024, when the yen previously weakened beyond the 160 level against the dollar, Japanese authorities intervened in the market on multiple occasions. However, officials have repeatedly emphasized that their focus is on excessive volatility rather than defending a specific exchange rate level.
Morgan Stanley strategist Ikue Saito commented, "We believe intervention is likely to occur before the dollar-yen rate reaches the 162 level." During the two-day Fed meeting in Washington, officials led by Chair Jerome Powell held interest rates steady but signaled growing divisions within the policy committee over the outlook, citing energy and inflation shocks stemming from conflicts in the Middle East.
Investors remain on edge as the U.S. and Iran contest control of the Strait of Hormuz. This uncertainty is supporting the U.S. dollar and keeping oil prices elevated, which in turn is exacerbating inflation in Japan and increasing downside risks to economic growth. It was reported that U.S. President Donald Trump stated on Wednesday that he would not lift the maritime blockade on Iranian ports until an agreement is reached with Tehran regarding its nuclear program.
Strategists at UBS Global Wealth Management, including Teck Leng Tan and Dominic Schnider, have revised down their forecasts for the yen. This adjustment is partly due to the impact of persistently high oil prices on Japan's balance of payments and their expectation that the Bank of Japan will pursue a "cautious" path of policy tightening.
Traders also significantly reduced bets on the Bank of Japan tightening policy in June, as reflected in swap market activity on Wednesday. Market pricing now indicates a probability of a rate hike below 50%, down from a peak of approximately 68% just one week ago.
Goldman Sachs strategist Karen Reichgott Fishman noted on Wednesday, "The likelihood of direct intervention would increase if the dollar-yen pair rises rapidly to the 163-164 range. However, we view the movements in the yen and Japanese government bonds as consistent with fundamentals, with downward pressure stemming from rising inflation and policy constraints."
From a technical perspective, the level of 161.95 represents a key point of potential weakness, as it was the yen's lowest point reached in 2024. A breach of this level would see the yen return to trading ranges last observed in 1986.
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