The yen is once again approaching levels that triggered Japanese government intervention a month ago, leading markets to reassess Tokyo's remaining financial firepower and its political will to defend the weak currency. As of the latest update, USD/JPY is trading at 159.27.
**Sufficient Firepower for Intervention, But U.S. Understanding is Crucial** The Japanese government is suspected to have conducted multiple rounds of yen-buying intervention in late April and early May, spending approximately $63 billion in total. This represents only a small fraction of its roughly $1 trillion in foreign exchange reserves. However, traders believe it is unrealistic to deploy all or even most of these reserves. With speculative short bets against the yen heating up again, Japanese authorities also aim to keep markets on edge. Daisaku Ueno, chief FX strategist at Mitsubishi UFJ Morgan Stanley Securities, stated: "The more the FX reserves shrink, the more vulnerable Japan appears in the eyes of speculators." He noted that with no signs of easing pressure on yen selling, "the psychological battle between authorities and the market looks set to continue." Yen-buying intervention requires selling foreign assets. As of the end of April, Japan held about $1 trillion in foreign assets. Yuriko Tanaka, an economist at Goldman Sachs, estimated based on Bank of Japan money market data that after deducting the roughly ¥10 trillion (approx. $62.78 billion) used in April and May actions, Japan still has about ¥150 trillion in reserves left, sufficient for "about 30 rounds" of intervention. Although Japan's remaining financial "firepower" is still relatively ample, depleting a large portion or all of its overseas assets is not feasible, especially as it would negatively impact the value of U.S. Treasuries. This means Japan's current actions urgently require U.S. cooperation, similar to the U.S. Treasury's so-called "exchange rate inquiry" in January this year to help push USD/JPY lower. Japan's intervention in late April to early May has already sparked strong dissatisfaction from the U.S. side. U.S. Treasury Secretary Janet Yellen has repeatedly publicly criticized Japan's currency intervention practices, explicitly advocating that Japan should stabilize the yen through interest rate hikes rather than FX intervention. The core U.S. concern is that Japan's intervention funds primarily come from selling U.S. Treasuries, and sustained selling could further push up U.S. bond yields, exacerbating volatility in U.S. financial markets. With Middle Eastern conflicts driving up oil prices and intensifying global inflation concerns, U.S. yields were already on an upward trajectory; Japan's bond selling adds "fuel to the fire," further heightening U.S. anxiety. As the U.S. fiscal deficit continues to widen and Treasury issuance surges dramatically, the Trump administration will not tolerate Japan's policy fluctuations indirectly pushing up already elevated U.S. bond yields. Takeshi Ueno, senior economist at NLI Research Institute, said: "U.S. understanding is crucial for sustaining the effectiveness of any intervention." He added that if Washington expresses opposition to such operations, "it could trigger speculative yen selling." Another factor that may limit Japanese authorities' intervention actions is an International Monetary Fund (IMF) standard suggesting that a country intervening too frequently in FX markets could lose its "free-floating" exchange rate status. However, Masato Kanda, Japan's top currency diplomat, has stated that IMF rules do not restrict the number of times a government can intervene. Akira Moroga, chief market strategist at Aozora Bank, said: "The current thinking is that curbing excessive volatility takes precedence over other considerations." He added that even if Japan loses its free-floating currency classification, "I don't think they would care at all." Japanese Finance Minister Shunichi Suzuki again declined on Friday to comment on whether his ministry had intervened in the market, only reiterating that officials are prepared to take "decisive action." Influenced by the Middle East situation, the yen remains under pressure. Soaring energy prices have caused a terms-of-trade shock for Japan, which is almost entirely dependent on oil imports, further exacerbating the yen's existing weak trend. Underlying reasons include the Bank of Japan's cautious stance on rate hikes and market expectations that Prime Minister Sanae Takaichi will introduce larger-scale fiscal stimulus. Additionally, the fact that real interest rates remain negative is another pressure point for the yen. Unlike previous governments that focused more on the speed of exchange rate movements, the current administration seems more focused on defending the "160 yen per dollar" level. Now, some market participants are even positioning ahead, betting the government will intervene again. A trader at a Japanese domestic bank said dollar buying is currently concentrated in the 155-157 yen range, reflecting importers' actual dollar demand and speculative positioning. The market widely expects the next round of Japanese government intervention to occur before USD/JPY reaches 162. Another trader at a Japanese domestic bank stated: "The government will defend this level at all costs." Overall, from the perspectives of policy odds, international cooperation space, and market structure, Japanese authorities now have significantly more limited "effective room" for intervention compared to the rounds in 2022 and earlier in 2024. If the yen's decline becomes faster, more disorderly, and clearly deviates from orderly fluctuations, Japan's Ministry of Finance may still step in, especially around 160 yen per dollar or weaker levels. For sustained effects, what could truly change the yen's weakening trend is more likely to be an easing of Middle East tensions and a drop in oil prices, or the Bank of Japan raising rates earlier than expected to narrow the U.S.-Japan interest rate differential.
**Bank of Japan Rate Hike Prospects Shrouded in Uncertainty** Apart from direct intervention by Japanese authorities, a Bank of Japan rate hike could also help support the weak yen. As concerns over inflation and fiscal policy have caused Japanese government bonds to plummet, investors are closely watching whether the central bank will raise rates next month. Bank of Japan Deputy Governor Ryozo Himino stated on Tuesday that maintaining market confidence through appropriate policy adjustments is crucial, explicitly noting that developments in the Middle East will be a key factor determining the timing and pace of rate hikes. Himino said: "The key is to maintain market confidence that the central bank will adjust the degree of monetary easing at an appropriate pace in the future based on economic, price, and financial conditions, thereby properly controlling inflation." He emphasized that given Japan's real interest rates remain extremely low, the central bank expects to continue raising the policy rate, but "the timing and pace of adjustments will be decided prudently by assessing the probability of achieving the baseline scenario and related risks, carefully analyzing how the Middle East situation affects Japan's economy and prices." Bank of Japan Governor Kazuo Ueda said on Wednesday that vigilance is needed regarding the impact of surging oil prices on core inflation trends, though he gave no clear hints on how this dynamic might affect the outcome of next month's policy meeting. Ueda stated: "Japan's experience shows that oil price shocks are never just oil price shocks. They are a test of the entire inflation regime." The governor traced the impact of oil price shocks dating back to the 1970s, noting, "We are actually facing the fifth oil price shock." In line with standard practice, the Bank of Japan governor avoided sending any public signals on the policy path. Nonetheless, as a reflection of concerns over the impact of high oil prices, Ueda's remarks may support widespread market speculation about a Bank of Japan rate hike next month. According to overnight index swap (OIS) data, as of Friday morning, traders priced in about a 77% probability of a Bank of Japan rate hike at the June policy meeting. However, Tokyo's core inflation indicator released on Friday unexpectedly slowed to its slowest pace in four years, potentially complicating the central bank's policy communication. Data from the Ministry of Internal Affairs and Communications showed that the consumer price index (CPI) for Tokyo in May, excluding fresh food, rose 1.3% year-on-year. This marks the sixth consecutive month of slowdown for this indicator and was below all but one economist's forecast in a survey. Meanwhile, the indicator excluding fresh food and energy—closely watched by the Bank of Japan to gauge underlying inflation trends—rose 1.6%. As it removes distortions related to government subsidies, this indicator is considered a cleaner reflection of price trends, though it is still affected by base effects from some food prices like rice, which saw unprecedented surges last year. Slower price increases for processed foods compared to last year, a significant drop in water service charges, and gasoline subsidies implemented by the Japanese government suppressed this CPI reading. The report suggests that while the government's plans are successfully easing the cost of living, they are also masking underlying inflation trends. Commenting on the latest data, economist Taro Kimura said, "We believe the Bank of Japan will see through the weakness in the overall data and remain vigilant about the upside inflation risks from rising oil prices. We continue to expect the Bank of Japan to raise rates by 25 basis points to 1% in June." Analysts point out that persistent inflation pressure in Japan, yen depreciation exacerbating imported inflation, and the global environment of monetary policy tightening provide logical support for a Bank of Japan rate hike next month. However, the central bank still has multiple concerns regarding a rate hike decision. First, the foundation for domestic economic recovery is very fragile; a rate hike could easily further suppress weak domestic demand and corporate investment. Second, Japan's government debt is massive; a rate hike would significantly increase fiscal interest payment pressure, endangering debt stability. Third, under prolonged low interest rates, financial institutions hold heavy positions in government bonds; a rate hike could trigger asset valuation losses, impacting financial system stability, while also needing to balance the pace with expansionary fiscal policy. Furthermore, Japanese political factors may add variables to policy tightening. Sanae Takaichi has long supported loose monetary policy, and her expansionary fiscal policy inclination has also, to some extent, pushed up long-term government bond yields, putting additional pressure on the yen. J.P. Morgan Private Bank noted that under the dual pressures of high energy prices and fiscal expansion, the Bank of Japan may need to maintain a relatively loose policy stance to mitigate potential demand contraction. Therefore, some analysts believe the Bank of Japan's most likely approach is a "small rate hike, emphasizing gradualism." The central bank will not return to aggressive tightening but will use a single hike to stabilize inflation expectations while using dovish rhetoric to prevent long-term rates from spiraling out of control. However, the market does not rule out the possibility that the Bank of Japan might "disappoint" again.
**Multiple Institutions Bullish on Yen** Notably, as the yen remains weak, several institutions have recently given positive outlooks for the currency. Alberto Tamura, head of Japan at Morgan Stanley, said he expects the yen to strengthen to around 140 yen per dollar, with a Bank of Japan rate hike being key to achieving this. Tamura stated that if the Bank of Japan fails to raise rates in June, it will impact bond and FX markets. He noted the yen could fall to 170 per dollar or rise to 140 per dollar depending on developments, though he did not provide a specific timeline. He said: "Some investors believe the Bank of Japan is slow to act, so it is particularly important to take the lead in making adjustments. If the global situation can stabilize, it could also drive yen appreciation." Mark Dowding, chief investment officer of fixed income at RBC BlueBay Asset Management, said the 160 yen per dollar level is becoming "increasingly attractive" with potential support from both possible official intervention and expectations for a Bank of Japan rate hike in June. The firm continued to add to its long yen positions last week as USD/JPY retreated towards 160. Dowding said: "We are confident the Bank of Japan will raise rates in June. If the 160 level is breached, we still expect intervention." Looking ahead one to three months, RBC BlueBay expects USD/JPY to fluctuate in the 152-160 range. Dowding also set clear lines for this trading strategy: if the yen weakens beyond 162 per dollar, they will continue to add positions; but if it breaks 164, they may exit all positions—as that would mean "the Bank of Japan and Sanae Takaichi's policies are too dovish, or the Ministry of Finance's FX intervention has failed." Dowding stated that if the Bank of Japan raises rates as expected in June, USD/JPY is more likely to be at the lower end of the range (around 152); whereas if the central bank's stance is dovish, it could push the exchange rate back towards 160. In a recent report, Stephen Jen, CEO of Eurizon SLJ Capital, and economist and fund manager Joana Freire stated that the yen has the potential to strengthen against the U.S. dollar in the future, reversing its weakness over the past few months. The institution believes that factors such as improved growth expectations for Japan, the possibility of further Bank of Japan rate hikes, and the Japanese government's push for corporate reform and capital repatriation could all drive funds back to Japan and support yen appreciation. Meanwhile, the Japanese government has intervened multiple times recently to curb yen depreciation. Eurizon further noted that Japanese authorities may even collaborate with the U.S. Treasury on FX intervention in the future.
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