USD/JPY Climbs Toward 160 as Doubts Grow Over Japan's Firepower

The Japanese yen weakened past 157 per dollar Tuesday, with traders pushing the currency back toward the key 160 level as the effects of last week's estimated $34 billion intervention fade against a strong US dollar.

"Whether the yen can hold onto its gains will probably depend on two factors,” said Matthew Ryan, head of market strategy at Ebury. “Firstly, the willingness of authorities to continue to intervene should the USD/JPY cross continue to test the 160 level. Additionally, whether or not the Bank of Japan will raise rates, and signal an openness to do more, at its June meeting.”

The yen's slide follows a brief, intervention-fueled rally last week after the currency touched a 34-year low beyond 160 per dollar. The dollar's strength is being supported by elevated oil prices, with Brent crude holding above $100 a barrel amid ongoing US-Iran tensions in the Strait of Hormuz, which contrasts with Japan's energy-import-reliant economy.

The core of the issue is the widening policy gulf between the Bank of Japan, which has been hesitant to signal further rate hikes after its historic shift from negative rates in March, and a Federal Reserve still concerned about inflation. This policy divergence creates a powerful incentive for traders to sell the yen and buy the dollar, forcing Japanese authorities into a costly and potentially unsustainable battle against market fundamentals.

Last week's action, which saw Japan likely spend around ¥5.4 trillion ($34.3 billion) to support the yen, provided only temporary relief. A sudden surge in the yen on Monday sparked fresh speculation of another round of intervention, but the currency has since resumed its decline. Tokyo’s firepower is not unlimited. A Finance Ministry official on Monday referenced International Monetary Fund guidelines, noting that Japan can likely conduct only two more multi-day intervention sessions by November while maintaining the yen's "free-floating" exchange-rate status.

"We suspect intervention will merely act as a lid on USD/JPY, not a catalyst for protracted yen strength," said Abbas Keshvani, Asia Macro Strategist at RBC Capital Markets, who noted that in 2022, Tokyo "fired three volleys of intervention in a few weeks" to defend the currency.

The yen's weakness is compounded by geopolitical factors that favor the dollar. The conflict in the Middle East has kept oil prices elevated, acting as a tax on Japan's economy while bolstering the dollar as a safe-haven asset. Following the conclusion of the Federal Reserve’s policy meeting last week, officials signaled a widening gulf regarding the outlook for policy given the shocks to energy and inflation.

This contrasts sharply with the Bank of Japan, which at its April meeting refrained from providing clear signals about the timing of its next interest-rate hike. This divergence is the principal driver of the yen's decline. With US interest rates significantly higher than Japan's, investors can earn a higher return by holding dollars, creating persistent downward pressure on the yen. While officials have repeatedly stated they are focused on excessive volatility, some analysts believe they have a level in mind.

“We believe intervention is likely to materialize ahead of the cycle high of 162” in the dollar-yen pair, said Ikue Saito, a strategist at JPMorgan. However, others believe the bar for action is rising. "The question now is whether authorities are forced back into action, but the bar looks higher in an environment where active war is the main driver,” said Brendan Fagan, a markets strategist at Bloomberg.

This article is for informational purposes only and does not constitute investment advice.