160.00 in sight: Why are strategists backing Japanese Yen strength despite its slide?

For the Japanese Yen (JPY), signs of a medium-term structural reversal are emerging. Attention is turning to Bank of Japan (BoJ) policy normalisation, the resilience of Japan’s economy and mounting currency intervention risks around the 160.00 threshold. USD/JPY briefly moved back towards key resistance at 159.00–160.00 following the US Consumer Price Index (CPI) inflation release. However, robust Japanese manufacturing sentiment, sustained wage growth and increasing demand for Japanese Government Bonds (JGBs) are reinforcing expectations that BoJ interest rates are moving towards neutral. Strategists at ING and MUFG see near-term US Dollar (USD) strength testing the upside in USD/JPY. They nevertheless argue that higher domestic yields and the threat of official intervention are making the Yen more attractive at current levels.

2% inflation stability and stronger Japanese data support BoJ tightening outlook: ING

Chris Turner at ING says stronger manufacturing sentiment is reinforcing the Bank of Japan’s assessment that inflation is sustainably anchored at 2.00%. Solid corporate earnings, higher wages and AI-led demand for data centres underpin that improvement. Turner expects broad US Dollar strength could briefly challenge technical resistance at 159.00. Above 160.00, however, he anticipates aggressive investor buying of cheap Yen.

"All of the above can feed into the Bank of Japan's view that inflation is now stable at 2.00% and its accommodative monetary policy can be reined in... The broadly strong dollar means that USD/JPY could easily push through resistance at 159, but we increasingly think investors will be looking to acquire cheap yen should USD/JPY push above 160 again."

JGB inflows and proximity to BoJ neutral rate favour medium-term Yen gains: MUFG

Derek Halpenny at MUFG sees medium-term risks tilted heavily towards Yen appreciation, citing the threat of official intervention and improving JGB market sentiment. That assessment comes despite US inflation figures driving USD/JPY back towards 160.00. With the BoJ approaching its neutral rate and potential tax incentives emerging to support domestic bond purchases, Halpenny considers the case for a sustained Yen reversal compelling.

"The yen weakened sharply yesterday in response to the US inflation data and USD/JPY has returned closer to the 160-level, above which intervention becomes a much greater prospect... There continue to be signs that confidence in the JGB market has improved, no doubt helped by the more active BoJ and the general consensus that within one or two hikes, the BoJ would be at the neutral policy rate... There is also growing speculation that the government will soon make changes to incentivise JGB buying by including individual JGB holdings in tax-free NISA accounts and/or removing these holdings from inheritance tax... With intervention likely halting the prospects to the upside, and confidence in the BoJ improving, the risks certainly look more skewed to yen strength over the medium term."

Yen recovery outlook: 160.00 intervention risk in focus

Domestic policy normalisation and growing JGB demand are starting to offset external yield pressures, bringing the Japanese Yen closer to a critical turning point. ING cautions that near-term USD momentum could carry USD/JPY towards 159.00. Both ING and MUFG nevertheless see the Yen positioned for a medium-term recovery, supported by the threat of official intervention above 160.00 and a Bank of Japan within 1–2 rate hikes of its neutral rate.

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)