The Yen as an instrument of failed policy

USD/JPY

Key zone: 156.50 - 157.50

Buy: 158.00 (on strong positive fundamentals) ; target 159.50-160.00; StopLoss 157.50

Sell: 156.00 (after retesting 156.50) ; target 154.50-153.50; StopLoss 156.50

Japanese authorities are once again attempting to stop the weakening of the national currency. During the May “Golden Week,” the Bank of Japan intervened in the foreign exchange market to support the yen, taking advantage of the traditional benefit of the holiday period — reduced trading liquidity.

The essence of such interventions lies in the large-scale purchase of yen on the international currency market. Previously, the regulator had already resorted to similar measures, seeking to limit the impact of the Middle Eastern conflict and spikes in energy prices on the Japanese currency exchange rate.

However, the result proved predictably limited. The mass closing of short yen positions did temporarily reduce speculative pressure, but it has not yet managed to reverse the persistent trend of its weakening against the U.S. dollar.

The current intervention by the Bank of Japan looks more like an attempt to buy time than a real instrument for reversing the currency market.

Reminder:

The intervention by Japanese authorities came after USD/JPY exceeded the 160.5 level at the end of April — one of the weakest yen levels in recent decades. In just a few hours, the currency pair fell by more than 3%, prompting speculation about large-scale support from Japan’s Ministry of Finance. According to market estimates, around ¥5.5 trillion ($35 billion) may have been spent to stabilize the exchange rate, while subsequent operations may have added another approximately ¥5 trillion.

Several fundamental factors continue to pressure the yen exchange rate simultaneously:

• low interest rates in Japan make the currency less attractive for international investors seeking higher yields;
• a weak yen increases import costs, primarily for energy resources, intensifying inflationary pressure and increasing the burden on government support programs;
• financial markets have already largely priced in the expected steps of the Bank of Japan to raise rates, limiting the effect of further policy tightening;
• the probability of a rate hike in June remains high; however, monetary policy still lags behind current economic realities, limiting long-term support for the Japanese currency;
• a significant additional pressure factor remains large speculative positions by private capital against the yen.

Historical experience shows that currency interventions are only capable of triggering short-term rallies and forcing market participants to close short positions. However, without support from fundamental factors, such actions rarely lead to the formation of a sustainable upward trend.

Any temporary strengthening of the yen — for example, amid U.S.-Japan negotiations or coordinated political signals — may be perceived by traders more as an opportunity to open new short positions than as the beginning of a полноценное recovery.

The situation surrounding the yen increasingly resembles a fight against the consequences rather than the root causes of the currency’s weakening. As long as the interest rate gap between the U.S. and Japan remains significant and fundamental drivers do not change, the Bank of Japan’s capabilities will remain limited.

Even large-scale currency interventions are capable only of temporarily slowing the exchange rate decline, but not changing the overall trend.

For the coming months, the USD/JPY pair retains prerequisites for a return to the 160–165 range, especially if expectations of a more hawkish Federal Reserve policy persist and the Japanese regulator continues to act cautiously.

So we act wisely and avoid unnecessary risks.

Profits to y’all!