The Japanese Yen plummets approaching 158: Central bank policy fails, government intervention window opens?

Last week (12/15-12/19), the foreign exchange market experienced increased volatility, with the US dollar index rising by 0.33%, and non-USD currencies generally under pressure. Among them, the Japanese yen plunged 1.28% to lead the declines, the euro fell 0.23%, the Australian dollar dropped 0.65%, while the British pound slightly increased by 0.03%. What signals are hidden behind this wave of selling?

The Big Drop in the Yen: The Paradox of Rate Hikes Leading to Depreciation

USD/JPY surged 1.28% last week, creating a rapid deterioration in the exchange rate. Surprisingly, the Bank of Japan raised interest rates as scheduled by 25 basis points but failed to prevent the yen from depreciating—in fact, it became a catalyst for accelerated depreciation.

The core issue lies in the dovish tone of BOJ Governor Ueda Kazuo. The market initially expected rate hikes to be accompanied by hawkish comments but was disappointed. Meanwhile, Prime Minister Sanae Noda’s cabinet announced a massive fiscal stimulus package of 18.3 trillion yen, directly offsetting the tightening effect of the rate hike, leading to ambiguity in the central bank’s policy signals.

What was the result? The market re-priced expectations, anticipating only one rate cut by the BOJ in 2026. Sumitomo Mitsui Banking Corporation even predicts the yen exchange rate could weaken to 162 in the first quarter of 2026. The yen’s sharp decline has become a foregone conclusion.

158 as the Critical Point for Government Intervention

JPMorgan issued a warning: if the yen continues to depreciate sharply beyond 160 in the short term, it will be classified as a rapid exchange rate movement, and the likelihood of government intervention will be very high. In other words, the 158-160 range is an observation window for potential intervention.

However, Nomura Securities’ forecast is quite different—in the context of the Fed’s continued rate cuts, the dollar is expected to weaken, making further yen depreciation difficult. They predict the USD/JPY rate will rebound to 155 in the first quarter of 2026.

Market divergence is intense, and expectations of government intervention are rising.

Technical Outlook: Short-term Upward Trend, but Top Risks Emerge

On the technical side, USD/JPY has broken above the 21-day moving average, and the MACD indicates a buy signal. If the exchange rate can effectively break through the 158 resistance level, a larger upward space could open up. However, this also means increasing pressure for government intervention.

Conversely, if the rate is pressured below 158, the probability of a correction will increase, with recent support around 154.

Euro: Fed Rate Cut Expectations as Support

Compared to the yen’s predicament, the euro has shown relatively stable performance. EUR/USD rose and then fell last week, ultimately closing down 0.23%.

The ECB maintained interest rates as expected, but President Lagarde did not provide the hawkish signals anticipated. US November non-farm payrolls and CPI data showed mixed results, with Morgan Stanley and Barclays warning of technical distortions in the data. The market currently expects the Fed to cut rates twice in 2026, with a 66.5% chance of a rate cut in April.

Danske Bank is optimistic about the medium-term outlook for the euro, believing that the real interest rate differential after inflation adjustment will narrow. Additionally, the recovery of European assets and increased hedging against USD depreciation will jointly support the euro. On the technical side, EUR/USD remains above multiple moving averages, with short-term targets near the previous high of 1.18. Support is seen at the 100-day moving average of 1.165.

Focus Points for This Week

The yen’s sharp decline will depend on Ueda Kazuo’s speech attitude and the extent of verbal intervention by Japanese authorities. If his comments lean hawkish or if intervention is escalated, USD/JPY will face downward pressure. The US Q3 GDP data will directly influence EUR/USD: better-than-expected data will favor the dollar, while weaker data will favor the euro.