The Japanese Yen exchange rate rebounds and breaks through the 156 level. How will policy expectations and central bank cycles influence the market outlook?

The Japanese Yen faces renewed depreciation pressure, but a rebound signal has already emerged. Since mid-December, the USD/JPY exchange rate has experienced intense volatility, climbing to a high of 157.76 before pulling back amid market expectations of Japanese government intervention. Currently, investors are most concerned about whether this rebound can continue and whether the Yen will enter a new appreciation cycle in the future.

Signals of government intervention intensify, is a turning point in the FX market imminent?

Japan’s Ministry of Finance has recently been vocal, sending strong policy signals to the market. Decision-makers like Satsuki Katayama emphasized that the government has ample room to respond to excessive exchange rate fluctuations. Jun Murasaki bluntly stated that the current exchange rate exhibits unilateral and extreme volatility, and the government will take appropriate measures to address it.

Industry insiders believe that the liquidity vacuum period from Christmas to New Year could be the best window for Japanese authorities to intervene. Matt Simpson, senior analyst at StoneX, pointed out that if intervention occurs, the low liquidity environment will significantly amplify policy effects. However, he also cautioned that unless USD/JPY breaks through the 159 level, the urgency for government action is not high. In contrast, during the more volatile market conditions of 2022, authorities did not act, and this time the atmosphere is much more subdued.

The long-term direction of the central bank’s rate hike cycle will determine the Yen’s depreciation trend, which may continue into next year

Short-term policy interventions are superficial; the real determinant of the Yen’s long-term trend is the monetary policy framework. Charu Chanana, Chief Investment Strategist at Standard Chartered Bank, pointed out the core issue: the Bank of Japan’s rate hike process is slow and cautious, while the Federal Reserve may begin easing cycle by 2026. This policy divergence will continue to support the dollar’s relative strength against the Yen.

In this context, the Yen’s unilateral depreciation trend is actually limited. More likely, it will fluctuate within a range—when US bond yields decline or global risk appetite shifts, the Yen may rebound. But risks should not be underestimated: if the US maintains high interest rates long-term and the Bank of Japan becomes overly cautious again, the Yen could fall into a prolonged weakness. Of particular interest is the outcome of Japan’s spring wage negotiations, which will directly influence the central bank’s view on inflation and rate hikes.

Divergence in timing of rate hikes creates uncertainty; market opinions on Yen outlook vary

There is a clear divergence in market expectations regarding the timing of the next Bank of Japan rate hike. Masaru Sakurai, a former BOJ policy board member, estimates that the window for raising rates to 1% could be June or July 2026. Meanwhile, Hitoshi Suzuki, chief FX strategist at Sumitomo Mitsui Banking Corporation, favors a later timing around October.

This timing difference may seem minor but has profound implications. Suzuki’s logic is that since there is still considerable time before the rate hike, the Yen will continue to face depreciation pressure. His forecast suggests that USD/JPY could test 162 in the first quarter of 2026. In other words, the Yen is entering a long-term weakening cycle unless the BOJ unexpectedly accelerates rate hikes.

Overall assessment: Yen’s outlook remains highly uncertain

The current Yen rebound is merely a short-term correction; the long-term trend remains dominated by the central bank’s policy cycle. Short-term government interventions may produce technical rebounds but are unlikely to change the fundamental outlook. Investors should closely monitor changes in expectations regarding the timing of rate hikes and specific signals of the Fed’s policy shift in 2026, as these will be key variables in assessing the Yen’s future trajectory.