Yen faces resistance at the 159 level, government intervention window period has emerged? Central bank rate hike schedule becomes the key

The Japanese yen has recently experienced intense volatility. After reaching a high of 157.76 in USD/JPY in December, it has pulled back as expectations of government intervention in Japan increase. Market speculation about when Japanese authorities will act and how they will respond to excessive fluctuations continues to stir, but what truly determines the future trajectory of the yen may not be short-term policy signals, but rather the long-term changes in the interest rate differential between the Bank of Japan and the Federal Reserve.

Policy Rhetoric Abounds, Intervention Expectations Rise

Japanese Finance Minister Shunichi Suzuki and Deputy Finance Minister Masamura Jun have respectively issued comments emphasizing that the government has ample discretion to act and expressing dissatisfaction with the recent unilateral movement of the exchange rate. Such policy-level “warnings” are often precursors to intervention, leading the market to remain highly alert to the possibility of action between Christmas and the New Year.

StoneX senior market analyst Matt Simpson pointed out that the period of liquidity drying up at year-end is actually an ideal window for policymakers to act—when market participants are scarce, interventions of the same scale can have a greater impact on prices. However, Simpson also cautioned that unless the yen’s decline further extends beyond the 159 level, the Japanese government may not consider the current situation worth intervening in, which is a stark contrast to the more tense atmosphere during the more volatile 2022 market conditions.

The Long-Term Logic of Yen Movements: Narrowing Interest Differentials and Range-Bound Fluctuations

What truly determines the future direction of the yen is the fundamental difference in monetary policy between the central banks. Charu Chanana, Chief Investment Strategist at Saxo Bank, analyzed that the Bank of Japan’s pace of rate hikes is relatively slow, while the Fed may initiate a loosening cycle in 2026. This gradual convergence of expectations suggests limited room for the yen to depreciate unilaterally, and it is more likely to fluctuate within a certain range—when U.S. Treasury yields decline or risk appetite shifts, the yen may rebound.

Chanana emphasized that the biggest risk is the U.S. interest rate remaining stuck at a high level for a long time, while the Bank of Japan becomes cautious again. The results of spring wage negotiations will serve as an important indicator to observe Japan’s inflation and subsequent central bank decisions.

Central Bank Rate Hike Schedule: Divergence Expected in 2026

Market expectations for the timing of the Bank of Japan’s next rate hike vary significantly. Bank of Japan Governor Kazuo Ueda expects the rate to rise to 1% around June or July next year, while Sumitomo Mitsui Banking Corporation’s Chief FX Strategist Hiroshi Suzuki believes the hike will be delayed until October 2026.

The implications behind this time gap are significant: the later the rate hike occurs, the harder it will be to reverse the yen’s depreciation trend. Suzuki even estimates that before the official start of rate hikes, the yen could further weaken to 162. Given the considerable time until the next decision, the market currently lacks catalysts to change the yen’s downward trend in the short term.

Summary: Short-term fluctuations in the yen are driven by policy expectations, but the medium-term trend is determined by changes in the interest rate differential. Government intervention may delay the pace of depreciation but is unlikely to reverse the fundamental trend. Investors should focus on the relative timing of central bank rate hikes and the Fed’s policy direction.