The policy target range for USD/JPY: a balancing dilemma between 145 and 155

The Bank of Japan and the Ministry of Finance are currently facing a complex policy dilemma: how to balance supporting the yen exchange rate with maintaining financial market stability. The USD/JPY trend has become the most closely watched focus for Tokyo policymakers, involving not only the exchange rate itself but also affecting the logic of stock and bond markets. According to the latest market analysis, USD/JPY will face significant uncertainties in the short term, and the effectiveness of policy interventions will directly determine the future market direction.

The Dilemma of BOJ Interventions: Short-term Stability vs. Long-term Challenges

Since mid-last year’s intervention efforts, Japanese authorities have attempted to ease yen depreciation through foreign exchange market operations. However, such unilateral interventions face inherent limitations: when fundamental factors do not change fundamentally, currency rebounds are often unavoidable. Historical data shows that while large-scale interventions have achieved short-term effects, the exchange rate tends to gradually rebound in the following months, indicating that interventions are not a long-term solution.

The main current risk is that the so-called “carry trade” effect still exerts pressure, which is a primary source of yen depreciation. Tokyo authorities are aware of this, but they can rely only on limited resources. The recent weakness of the US dollar is a rare positive factor. Meanwhile, since the BOJ meeting, bond market volatility has significantly eased, providing a breathing space for policy.

Recent Outlook: The Policy Intention to Keep USD/JPY in the 145-155 Range

According to market analysis from U.S. banks, Japanese authorities aim to keep USD/JPY within the 145 to 155 range in the near term. This range is not chosen arbitrarily but is a carefully balanced decision based on multiple considerations:

Manufacturers’ business expectations play an important role. According to the Tankan survey, large manufacturers assume an average USD/JPY exchange rate of 146.50 for fiscal year 2025. This data reflects Japan’s real economy’s tolerance for exchange rate levels. If USD/JPY falls below 145, it could put pressure on export-oriented companies, affecting stock market performance.

On the other hand, if USD/JPY fluctuates below 150, it could trigger a sharp decline in the stock market. This situation would increase the need for further intervention by authorities but also consume more policy space. Therefore, the 145-155 range is essentially the optimal compromise between market stability and bond market balance.

The Reality Gap in Long-term Goals: Why 127-145 Is Difficult to Sustain

Looking mid- to long-term, Tokyo authorities may ideally hope for USD/JPY to go even lower. According to analysts, the “break-even” USD/JPY rate for manufacturers in 2024-2025 is around 127. From this perspective, a range of 135 to 145 might be more desirable.

However, achieving this goal is far more difficult than expected. U.S. banks judge that relying solely on unilateral forex interventions will be extremely challenging. To keep USD/JPY within 135-145 in the medium term, additional policy measures beyond intervention are needed, such as further interest rate adjustments or structural reforms. This means the BOJ must make tough choices between supporting growth and controlling the exchange rate.

Lessons from History: Why Interventions Are Difficult to Sustain

Historical data offers clear warnings. During the mid-2024 intervention, USD/JPY was quickly pulled down from above 160 to about 140 in just two months. But the good times did not last; in the following months, the currency rebounded, reaching nearly 159 by early 2025. This history underscores a fundamental truth rooted in financial markets: purely technical interventions struggle against long-term fundamental drivers.

Reviewing this history, although USD/JPY has fallen from its peak to around 153, it still remains above the ideal levels policymakers desire. Since the gap-up move in early October, the pair has gained over 4%, reflecting that market forces betting against the yen remain strong.

Outlook: The Tug-of-War Between Policy Space and Market Reality

The future direction of USD/JPY will depend on multiple interacting factors. Policy intervention is necessary but insufficient. Japanese authorities must recognize that both the short-term target of 145-155 and the mid-term vision of 135-145 require fundamental support. If the dollar remains strong and the U.S.-Japan interest rate differential does not narrow, relying solely on intervention will face increasing resistance. This means that beyond forex market efforts, the BOJ’s choices in monetary policy and structural reforms will ultimately determine whether USD/JPY can operate within a manageable range.