• USD/JPY climbs toward 162.30 on Monday, supported by a broad-based US Dollar rally.
• Investors remain alert to the risk of intervention by Japanese authorities as the pair approaches 40-year highs.
• MUFG believes markets are still underpricing the Bank of Japan's monetary policy normalization outlook.

USD/JPY trades around 162.30 on Monday at the time of writing, up 0.58% on the day, extending its rebound after last week's pullback. The pair is moving back toward the nearly 40-year high of 162.84 reached on Wednesday, as broad US Dollar (USD) strength continues to dominate the foreign exchange market and keep pressure on the Japanese Yen (JPY).

The US Dollar is benefiting from renewed demand despite last week's weaker-than-expected Nonfarm Payrolls (NFP) report. Investors are reassessing the Federal Reserve's (Fed) policy outlook, while geopolitical tensions in the Middle East, particularly surrounding the Strait of Hormuz, are also supporting safe-haven flows into the Greenback.

At the same time, the wide interest rate differential between the United States (US) and Japan continues to fuel carry trades at the expense of the Japanese Yen. Although the Bank of Japan (BoJ) is gradually normalizing its monetary policy, its interest rates remain well below those of other major central banks, limiting support for the Japanese currency.

The persistent weakness of the Japanese Yen is nevertheless keeping markets on alert. Japanese officials recently reiterated that they stand ready to intervene against excessive foreign exchange moves, although no action has been taken so far. Some market participants believe Tokyo could opt for an unannounced intervention to catch speculative traders off guard.

Meanwhile, MUFG analysts argue that markets are still underpricing the Bank of Japan's tightening potential. According to the bank, accelerating inflation and rising Japanese government Bond yields could push the central bank to raise interest rates further in the coming months. MUFG now expects the policy rate to reach 1.5% by January 2027, with the next rate hike projected for September.

At the same time, HSBC believes USD/JPY could remain in a higher trading range for an extended period as long as the US-Japan interest rate differential remains wide. However, the bank also expects Japan's Ministry of Finance to continue intervening selectively to prevent excessive depreciation of the JPY.