The Japanese Yen breaks through the 156 level against the US dollar! Policy intervention signals are being released. How will the market evolve moving forward?

On December 23, the Japanese yen experienced a noticeable rebound against the US dollar, driven by market expectations. This change is closely linked to recent policy signals from the Japanese government. Finance Minister Shōzō Katō publicly stated that the government has the discretion to take bold actions to respond to exchange rate fluctuations. On the same day, Deputy Finance Minister Jun Murasawa further added that due to recent sharp and unilateral currency movements, authorities will take appropriate measures against excessive volatility. As a result, market expectations of imminent intervention by the Japanese government have significantly increased, which also explains the clear reversal in the yen’s depreciation trend against the dollar.

Key Moments in Exchange Rate Fluctuations

Looking back to December 19, USD/JPY( once surged to 157.76. This high was reached amid the Bank of Japan’s relatively moderate rate hike strategy. Compared to the more intense market turbulence in 2022, the recent exchange rate volatility was different, with less market turbulence and a lower likelihood of triggering emergency policy responses from policymakers.

Timing Window for Policy Intervention

There are differing opinions among market analysts about whether the Japanese government will take action during the upcoming Christmas holiday and New Year period. StoneX senior market analyst Matt Simpson believes that if Japanese authorities truly intend to intervene, the period from Christmas to New Year, when market liquidity is relatively low, could be the optimal time for effective intervention. However, he also notes that unless the yen falls below 159 against the dollar, the government may hold off for now. Compared to the 2022 situation where market pressure forced action, this time the market seems to lack that sense of urgency.

Long-term Game Between Central Bank Policies and Exchange Rate Outlook

Looking further ahead, Saxo Bank Chief Investment Strategist Charu Chanana offers a different perspective. She believes that the slow pace of the Bank of Japan’s rate hikes, contrasted with the Federal Reserve potentially shifting to easing policies in 2026, reduces the likelihood of a one-sided yen depreciation. Instead, range-bound oscillations are more likely to become the market’s dominant pattern. When US Treasury yields decline or global risk appetite shifts, the yen may reappreciate against the dollar. She emphasizes a particular risk: if US interest rates remain high for an extended period and the Bank of Japan becomes cautious again, the situation could reverse. Additionally, she recommends closely monitoring Japan’s spring wage negotiations, a key variable.

Market Divergence on Timing of Central Bank Rate Hikes

The market generally expects the Bank of Japan to initiate a new rate hike cycle in the second half of 2026. However, there are differences among experts regarding the specific timing. Former BOJ Policy Board member Seiji Sakurai predicts that the next rate hike to 1% could occur around June or July next year. Meanwhile, Sumitomo Mitsui Banking Corporation Chief FX Strategist Hiroshi Suzuki provides a more conservative timetable—October 2026.

Suzuki further analyzes that, given the long time horizon until the rate hike, the yen’s exchange rate against the dollar is more likely to continue depreciating during this period. He estimates that by the first quarter of 2026, the yen could weaken further to around 162. This assessment offers an important reference framework for market participants.