By Linh Tran, Market Analyst at XS.com
The USDJPY exchange rate has risen above 157, approaching the 52-week high around 158.8 and the historical high near 161.9. This reflects the extremely large monetary policy divergence between the U.S. and Japan.
However, in the coming period, the story will not revolve solely around a strong USD and a weak JPY anymore. The market is entering a sensitive phase in which U.S. yields, the policy direction of the Bank of Japan (BoJ), and the risk of intervention from Japan’s Ministry of Finance will determine the main trend of this currency pair.
Throughout 2024–2025, USDJPY rose sharply mainly because U.S. Treasury yields remained consistently high, while Japanese interest rates stayed near zero. Recent U.S. labor data has remained solid, with strong job growth, steady income gains, and no clear weakening in consumption. This has kept U.S. yields anchored and continued to support the USD.
However, as the Fed shifts into the phase of “keeping interest rates high for long enough” instead of continuing to raise rates, the momentum for U.S. yields to break out further has decreased significantly. The market has even begun to expect that the Fed might slightly ease policy in 2026 if growth cools. Therefore, although the USD remains supported, its upward momentum is no longer as strong as before, opening the possibility that USDJPY may be forming a top.
One notable point in the current period is the change in BoJ’s policy stance. After more than a decade of maintaining low rates, the BoJ is facing the highest inflation in more than 30 years. Japan’s core CPI has stayed above 2% for 36 consecutive months, something that has never happened before. In addition, wage growth in Japanese corporations has been strong, with increases of more than 5% in the 2025 Shunto negotiations.
The growing inflation pressure is forcing the BoJ to face pressure to normalize policy. Several BoJ members have recently expressed more hawkish views, emphasizing the risks to the market if interest rates remain too low for too long. This has increased expectations that the BoJ will raise interest rates one more time in the near future, or at least send a clearer signal about gradually tightening policy.
If this happens, the JPY may strengthen significantly in the medium term, even if the impact on the exchange rate may not be immediate.
Besides the yield differential, an equally important factor is the response of Japan’s Ministry of Finance (MoF), the agency responsible for market intervention when the JPY weakens too quickly. History shows that Japan often intervenes when USDJPY moves far beyond the 155–160 zone and experiences sharp volatility in a short period of time. Currently, the exchange rate is at a sensitive level around 157, very close to the threshold at which policymakers typically begin issuing warnings and preparing to act.
MoF officials have recently repeatedly stated they will “act decisively if necessary to prevent excessive volatility.” USDJPY may continue rising for several sessions, but just one intervention move—or even rumors of intervention—could trigger a sharp drop within minutes.
Taken together, current factors indicate that USDJPY still maintains an upward trend in the short term thanks to U.S.–Japan policy divergence, but the upside room is no longer wide. U.S. yields are showing signs of stabilizing, the BoJ is increasingly leaning toward a tightening stance, and the risk of intervention from the MoF helps limit the pair’s upward momentum. Any unexpected hawkish signal from the BoJ or intervention by the Japanese government could trigger a sharp correction toward lower levels.