The US dollar continued its ascent against the Japanese yen during Asian trading hours on Monday, with the pair climbing back above 161.50, nearing the peak it reached last week, which was its highest level since July 2025. Despite ongoing market discussions about potential intervention by Japanese authorities, capital flows and interest rate differentials continue to dominate the currency's trajectory.
Japanese Finance Minister Satsuki Katayama reiterated on Monday that the government is closely monitoring foreign exchange market movements and will take appropriate measures if necessary to address excessive volatility. However, such verbal warnings have so far proven insufficient in halting the yen's further depreciation, with the market showing a limited response to official rhetoric.
The primary factor weighing on the yen remains the energy security risks stemming from escalating tensions in the Middle East. As an economy heavily reliant on energy imports, Japan is particularly sensitive to disruptions in global energy supply. The renewed closure of the Strait of Hormuz has fueled concerns that rising import costs could exert fresh pressure on Japan's economic recovery.
The Strait of Hormuz handles approximately 20% of global seaborne crude oil shipments, a channel upon which Japan's energy supply is highly dependent. Iran announced the closure of the strait again, accusing the US and Israel of undermining a ceasefire agreement, while Israel continues military operations in Lebanon. US President Trump warned that the US might take new military action if related armed groups continue attacks on Israel. These factors have collectively heightened risk aversion in the markets.
Simultaneously, the positive impact of the Bank of Japan's (BoJ) further monetary policy tightening is being gradually absorbed by the market. Last week, the BoJ raised its policy rate to 1.00%, the highest level since 1995. Meeting minutes revealed that some board members supported a faster pace of rate hikes to prevent potential inflation overshooting. Additionally, a BoJ deputy governor stated that policy normalization would continue based on changes in economic conditions, inflation, and the financial environment.
Nevertheless, even with the BoJ maintaining a hawkish stance, a significant interest rate advantage remains in favor of the US. The current US federal funds rate is held within the 3.50%-3.75% range, substantially higher than Japan's rate level. The US-Japan rate differential still exceeds 250 basis points, sustaining demand for carry trades that supports the USD/JPY pair.
On the other hand, while the US Federal Reserve held rates steady last week, its overall policy tone was notably hawkish. As energy price fluctuations increase future inflation risks, the market has begun reassessing the potential for further US policy tightening. Some investors are already betting that the Fed retains room for additional rate hikes.
The US dollar index remains strong, underpinned by safe-haven demand and expectations of high interest rates, further propelling USD/JPY higher. The market consensus is that, with the BoJ's rate hike pace significantly lagging behind the Fed's, the yen is unlikely to escape its weak pattern in the short term. Future market focus will remain on developments in the Middle East, whether the Japanese government takes concrete FX intervention measures, and shifts in Fed policy expectations. If the dollar maintains its strength and Japanese authorities refrain from substantive action, USD/JPY may continue its push toward the 162 psychological level.
Technical Analysis: Daily Chart
From a daily chart perspective, USD/JPY continues the uptrend established since the start of the year, once again approaching a key resistance zone near the 162 level. The price remains above its major moving averages, indicating the uptrend remains intact. While the 161.80 to 162.00 area presents significant psychological resistance and is also viewed as a potential intervention zone, bulls remain in control as long as the trend persists. Key resistance levels to watch above are 162.00 and 163.50; a break above could open the door for further gains. On the downside, crucial support zones lie at 160.00 and 158.80. As long as the pair holds above these levels, the medium-term uptrend is expected to continue.
Technical Analysis: 4-Hour Chart
On the 4-hour chart, the pair has resumed its upward momentum following a brief consolidation, with short-term moving averages maintaining a bullish alignment. The rising price lows indicate active buying interest remains. However, as the pair nears the 162 level, caution is warranted due to the potential for sharp, short-term volatility triggered by verbal or actual intervention from Japanese authorities. A successful break above 162.00 could pave the way for a test of the 163.00 to 163.50 region. Conversely, any intervention-related news could trigger a rapid pullback toward the 160.00 support area. Overall, the trend remains bullish, but volatility risks at elevated levels have increased noticeably.
Key Market Drivers
The core drivers behind the sustained rise in USD/JPY remain the US-Japan interest rate differential and heightened safe-haven demand for the US dollar. Although the Bank of Japan has initiated a further rate-hike cycle, the pace of policy tightening is insufficient to close the rate gap with the United States. Concurrently, energy risks from the escalating Middle East situation are amplifying concerns over Japan's economic outlook, further weakening the yen. In the near term, the 162 level will be a key focal point; a decisive break could attract more trend-following capital. However, given the rising risk of intervention by Japanese authorities, investors chasing the rally should remain vigilant against the potential for significant exchange rate volatility.
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