The USD/JPY pair continued its corrective movement during the Asian trading session on Friday, with the exchange rate falling back to around 159.90, marking a second consecutive day of declines. As the yen regained buying support, market expectations for potential renewed intervention by Japanese authorities intensified, placing significant pressure on the pair near the key psychological level of 160.
Where to begin
The primary driver behind the yen's recent movements stems from policy-related intervention risks. Japanese Finance Minister Shunichi Suzuki reiterated warnings to the market, emphasizing that authorities are closely monitoring foreign exchange market developments and will take appropriate measures as needed to address excessive volatility. With USD/JPY having previously approached the critical 160 level, the market widely perceives that the Japanese government remains highly vigilant against excessive yen depreciation.
Speculation mounts
In fact, speculation that Japan has already conducted intervention operations continues to circulate in the market. Data shows Japan's foreign exchange reserves fell to $1.31 trillion by the end of May, down approximately $77.1 billion from $1.38 trillion the previous month, reaching the lowest level since July of last year. Foreign currency assets within the reserves declined to about $1.09 trillion. Some market participants believe the significant drop in reserve levels may be linked to recent operations by Japanese authorities to stabilize the currency.
Policy stance clarified
Simultaneously, the Japanese government does not view currency depreciation as an economic policy objective. Japanese Prime Minister Fumio Kishida stated that while a weaker yen has both advantages and disadvantages, the government's policy focus is on enhancing domestic economic competitiveness, not artificially stimulating growth through a lower exchange rate. This statement has somewhat alleviated market concerns regarding policy direction.
Economic data mixed
On the economic data front, domestic consumption in Japan remains weak. Data revealed that Japanese household spending fell by 0.5% year-on-year in April, marking the fifth consecutive month of decline. However, compared to the previous month's 2.9% drop, this figure showed a clear improvement and also surpassed the market expectation of a 1.5% decline, indicating a moderation in the weakness of consumption.
Wage growth provides support
In contrast, Japanese wage growth has shown more strength. Labor cash earnings rose by 3.5% year-on-year in April, exceeding the revised previous figure of 3.1% and the market forecast of 3.2%. This marks the 52nd consecutive month of growth in nominal wages, demonstrating continued resilience in the labor market.
Implications for monetary policy
The market widely believes that sustained wage increases will further help maintain stable domestic inflation in Japan, thereby creating conditions for the Bank of Japan to exit its ultra-loose monetary policy. Investor expectations for a potential rate hike by the Bank of Japan at its June 15-16 meeting have notably increased, becoming a key factor supporting the yen in the near term.
US factors in play
On the other hand, US economic data and the Federal Reserve's policy outlook continue to influence the US dollar. As the US non-farm payrolls report approaches, the market is assessing whether signs of a slowdown are emerging in the American labor market. If job growth proves significantly weaker than expected, expectations for the Fed maintaining high interest rates could be challenged, further weakening the dollar's performance.
Market sentiment and technical outlook
From a market sentiment perspective, USD/JPY is currently in a phase of intense tug-of-war between opposing factors. On one hand, US interest rates remain higher than Japan's, with the interest rate differential continuing to support the dollar. On the other hand, the risk of Japanese government intervention and potential Bank of Japan rate hike expectations are limiting the pair's upside potential. Observing the daily chart structure, USD/JPY remains within a long-term uptrend but has recently shown clear technical pressure near the 160 level. Key support below is located around 159.00, with secondary support in the 158.20 area. Key resistance levels above are situated near 160.50 and 161.80. The MACD indicator is gradually showing signs of a bearish crossover at high levels, indicating some weakening of bullish momentum. The RSI indicator has retreated from overbought territory, suggesting increasing short-term correction pressure.
Short-term perspective
From a 4-hour cycle perspective, the exchange rate has broken below short-term moving average support, entering a broader high-level correction phase. If it subsequently breaks below the 159.00 level, it could further test the 158.20 or even the 157.00 area. If it manages to regain a foothold above 160 and break through the 160.50 resistance, it may once again test highs near 161.80. The short-cycle MACD indicator maintains a bearish alignment, indicating the short-term trend remains biased towards weak consolidation.
Final thoughts
The current USD/JPY movement is influenced by a combination of Japanese policy factors and US economic data. Persistent intervention signals from the Japanese government, coupled with strong wage growth fueling Bank of Japan rate hike expectations, are providing periodic support for the yen. Simultaneously, the sharp decline in Japan's foreign exchange reserves has further intensified market speculation about actual intervention actions. Looking ahead, the 160 level will remain a focal point for the market. If the Bank of Japan signals more explicit policy tightening, or if US employment data shows weakness, USD/JPY could retreat further. Conversely, if the US economy maintains its resilience and the Bank of Japan remains cautious, the exchange rate may continue to operate at elevated levels. Investors should closely monitor the outcome of the Bank of Japan meeting, Japanese government statements on the currency market, and changes in US labor market data.
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