USD/JPY hits 156 and rebounds; Bank of Japan rate hike expectations become a key variable

Policy Signals Behind the Sudden Exchange Rate Shift

On December 23, the USD/JPY exchange rate experienced a significant rebound, breaking through the 156 level. The catalyst came from a firm stance by Japan’s financial authorities—Finance Minister Shōzō Katō stated he has the authority for “bold actions,” followed by Deputy Finance Minister Jun Mura emphasizing that the government will take appropriate measures against excessive volatility. The market responded immediately; the previously rising dollar came under pressure, and the yen reversed its depreciation trend.

Looking back less than a week, after the dovish rate hike news from the Bank of Japan, USD/JPY once surged to a high of 157.76. The intensive statements from government officials broke this upward momentum, indicating limited tolerance for excessive yen depreciation.

Has the Intervention Window Really Arrived?

Regarding when the government will actually intervene, opinions are divided. StoneX analysts believe that if Japanese authorities do step in, the period from Christmas to New Year’s, when liquidity is scarce, could maximize the effectiveness of intervention—since in a low-trading environment, a small amount of buying can move the exchange rate.

However, they also point out that unless USD/JPY falls below the 159 level causing panic, the government may not need to act urgently. Compared to the more volatile market periods of 2022, when traders frequently pressured the Ministry of Finance to intervene, this time the market sentiment is relatively calm, reducing the likelihood of aggressive intervention.

The Pace of BOJ Rate Hikes Will Determine the Yen’s Long-Term Direction

What truly influences USD/JPY is the relative difference between the Bank of Japan’s rate hike cycle and the Federal Reserve’s policy. Strategists at Saxo Bank note that the slow pace of BOJ rate increases, combined with the Fed’s potential rate cuts around 2026, limits the scope for the yen to depreciate unilaterally—more likely, the currency will fluctuate within a range, strengthening temporarily when US Treasury yields decline or risk appetite reverses.

The biggest risk is if the US maintains high interest rates long-term while the BOJ shifts back to caution. This combination would put additional pressure on the yen. The market generally expects the BOJ’s next rate hike not to occur until the first half of 2026—former BOJ officials estimate June or July as a “possible” timing, but Sumitomo Mitsui Banking Corporation’s chief strategist is more conservative, believing October is the true window for a rate increase.

Medium-Term Outlook: Yen Depreciation Pressure Remains

“Rate hikes are still far off, and the exchange rate is likely to depreciate sharply in the short term,” industry insiders say. Because the BOJ’s next move is still distant, the yen lacks supporting factors. Institutions forecast that USD/JPY could reach around 162 in the first quarter of 2026.

Before that, factors such as Japan’s spring wage negotiations and US Treasury yields will impact the yen. Government statements may temporarily curb excessive volatility, but fundamentally reversing yen depreciation will not be easy.