USD/JPY: Back to the 1980s

Articles USD/JPY: Back to the 1980s 12:45 FX Japan United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download In breaking above the 2024 highs near 162, USD/JPY has returned to levels not seen since the 1980s. Traders continue to second-guess when and where the Bank of Japan will intervene again, but the outlook for successful intervention remains poor Chris Turner Tokyo: imagery from the 1980s reflects the backdrop revisited by USD/JPY Intervention incoming Having sold just over $70bn in late April/early May at levels just above 160, the BoJ is widely expected to intervene again over the coming days and weeks. Japanese officials have made it clear that the weak yen poses a threat to import costs and Japan’s cost of living crisis, which has been a key topic for the electorate.

Currently, those cost of living concerns are being addressed through government subsidies, which themselves bring some concern for the bond market. In recent years, the BoJ has typically intervened in clustered bursts of two to three days when it believes intervention is most likely to be effective. These episodes have tended to coincide with holiday-thinned market conditions, allowing the BoJ to deliver a bigger bang for its intervention buck.

Also important is market positioning. What we note today is that the speculative position is quite short yen, but not as extreme as it was during the successful intervention campaign of summer 2024. In terms of immediate timing, we suspect the BoJ might hold off ahead of possible dollar-positive event risks such as remarks tomorrow from Federal Reserve Chair Kevin Warsh and Thursday’s release of the June US jobs report.

That makes Friday’s US July 4 th holiday a possible window for intervention. A no-show from the BoJ this week would strengthen the case for holding off until 16–17 July, just ahead of Japan’s next public holiday, Marine Day on 20 July. That was the 2024 playbook.

If the BoJ does wait until later in July and US data and Fedspeak remain hawkish, USD/JPY could be trading around 164–165 by then. For reference, the FX options market now attaches a 37% probability to USD/JPY touching 165 by the end of July. Speculative yen positions and USD/JPY Source: Japanese Ministry of Finance, ING "> Source: Japanese Ministry of Finance, ING Constraints on intervention?

FX reserves are finite resources and bouts of selling are used with care. Currently, Japan has close to $1.1trn in FX reserves. The low point this decade has been around $1.07trn, but we doubt the $1trn level represents a psychological floor.

As a reserve currency issuer with a huge net international surplus position after decades of current account surpluses, Japan is not subject to the same reserve adequacy constraints as many other countries. That said, we suspect the authorities would be reluctant to lose more than a third of their reserves to intervention (as Chile did in 2022), suggesting that the $800-900bn range could be a practical floor for Japan’s FX reserves. At the same time, we think the Japanese are taking notice of the IMF’s classification system for ‘free floating’ exchange rates and would not want to lose that status.

Intervening on more than three instances over a six-month period could see Japan’s currency regime downgraded to just ‘floating’. The IMF defines an ‘instance’ of intervention as lasting no longer than three business days. Being re-classified as a floating regime would see Japan lose its seat at the top table, with potential implications for sovereign and corporate borrowing costs.

The US Treasury angle Let’s not forget that when the BoJ sells FX, it is selling part of its securities book. Indeed, the May FX reserve data showed the BoJ’s holdings of securities dropping $75bn – which presumably reflects sales of US Treasuries. That should also be confirmed when the US TIC data is released for the month of May.

Equally, TIC data back in 2024 did show a large reduction after the intervention campaign that summer. On the subject of the US Treasury, we have said before that joint FX intervention between the US and Japan would be a big deal and deliver a sharper market adjustment. Were we to see headlines of the Fed checking rates, or indeed selling USD/JPY, traders would be looking at whether that activity was merely the Fed acting as an agent for the Japanese or on behalf of the US Treasury.

Recall that USD/JPY sold off heavily in January this year when the Fed checked USD/JPY rates late on a Friday – an operation conducted on behalf of the US Treasury. The USD/JPY outlook The yen is very cheap, but the BoJ realises that trying to sell USD/JPY into a fundamentally driven rally can only slow, not reverse the trend. The success of intervention in 2024, in addition to extreme short yen positioning, owed a large part to the turn in the dollar cycle as the Fed prepared to cut rates in September 2024.

Currently, with US activity data holding up and investors exploring the dollar’s upside on a potentially hawkish Fed, the BoJ can only hope to slow the USD/JPY advance this summer. At the same time, the market suspects that government pressure will not allow a rapid tightening cycle from the BoJ this year, where the market now prices just one 25bp hike – to 1.25% – by year-end. That looks unlikely to provide much support to the yen.

USD/JPY looks like it can probably trade near the 160 area for several more months, possibly nearing 165 before intervention, and trading as low as 155/157 depending on the size and timing of intervention. And currently, we have a 158 year-end 2026 forecast – with some downside risks if Fed hawkishness abates on lower US inflation and softer activity by year-end. Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives.

The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Chris Turner Global Head of Markets and Regional Head of Research for UK & CEE Chris is Global Head of Markets and Regional Head of Research for UK & CEE. Together with his team, he provides short and medium-term FX recommendations for ING's corporate and… In this article Intervention incoming Constraints on intervention?

The US Treasury angle The USD/JPY outlook