Japanese Yen Exchange Rate Trend Reverses, US-Japan Policy Warm Winds Drive Rebalancing of Bulls and Bears

Recently, major changes have occurred in the financial markets. Driven by signals of joint intervention from the US and Japanese authorities, the yen has stopped its long-term depreciation and rebounded, with short investors accelerating their positions to close. At the end of January, USD/JPY briefly surged to a high of 154 before pulling back, and market expectations for the yen’s exchange rate are quietly shifting. Behind this change are both domestic political developments in Japan and clear signals from US-Japan policy levels.

Policy Intervention Signals Emerge, Yen Shorts Suffer Heavy Losses

The event’s starting point is not complicated. On January 23, the Federal Reserve Bank of New York proactively called major financial institutions to inquire about real-time USD/JPY quotes. This seemingly routine action triggered a chain reaction in the market—widely interpreted as a prelude to US cooperation with Japan on currency market intervention.

Why would the US be willing to intervene? Prime Minister Fumio Kishida announced the dissolution of the House of Representatives and early elections on January 23, with tax cut promises raising concerns among investors about Japan’s fiscal health. More troubling is that Japan’s long-term government bond yields have broken historical highs, creating unbearable pressure for the Bank of Japan and the Ministry of Finance, which rely on low interest rates. Against this backdrop, stabilizing the yen exchange rate and, consequently, the bond market has become a shared goal for both Japan and the US.

Krishna Guha, an economist at Evercore ISI, pointed out, “Preventing excessive yen weakness is the core consideration, with indirect stabilization of the Japanese bond market as a side effect. Even without actual intervention, such policy signals are enough to accelerate short covering in the yen.” This explains why we have recently seen short investors hurriedly close their positions.

New Exchange Rate Pattern: 150-155 as a Trading Arena

So, how will the yen’s exchange rate evolve?

Keiichi Inokuchi, a strategist at Risonna Holdings, said that the prolonged yen depreciation trend of recent years is coming to an end. “The market’s focus will shift to USD/JPY fluctuating within the 150 to 155 range.” The significance of this range is that it neither triggers more aggressive responses from the central bank nor prevents Japanese exporters from having relatively stable exchange rate expectations.

Brent Donnelly, a senior forex trader at Spectra Markets, believes that the Ministry of Finance in Japan is very likely to take concrete actions to intervene further. In a low-probability scenario, the US, Japan, and South Korea might reach some informal agreement to jointly stabilize their currencies. Based on these assumptions, he expects the downward trend of USD/JPY to continue.

Goldman Sachs’s Cautious Outlook: Uncertain Future

However, top global investment bank Goldman Sachs offers a different perspective. They point out that if the Bank of Japan fails to adopt a more hawkish stance or does not effectively stabilize the bond market through quantitative easing, the yen and Japanese bonds will continue to face downward pressure. This indicates to investors that the appearance of policy signals does not mean the problem is solved; the ultimate direction of the yen’s exchange rate still depends on Japan’s future policy choices.

Whether this US-Japan policy coordination can evolve into a historic intervention like the Plaza Accord of 1985 remains uncertain. But what is clear is that the yen is no longer simply a depreciating asset; its exchange rate has become a focal point in international policy negotiations. Market participants should continue to monitor subsequent policy developments and possible shifts in Japan’s monetary policy.