USDJPY Nears 160: Intervention or Rate Hike May Provide Short-Term Relief, But Wage Growth Is Key

Since October, the yen’s persistent weakness has become an unavoidable topic in the FX market. Last week, USDJPY briefly surged to 157, marking the highest level since January and inching closer to the “intervention red line” at 160. For an economy highly dependent on imports and external demand, such depreciation cannot be ignored.

In my view, this yen weakness is not merely a matter of market sentiment but a consequence of a misalignment between fiscal, monetary, and political forces: the government has opted for aggressive fiscal expansion to stimulate growth, the central bank hesitates between normalizing monetary policy and protecting a fragile economy, and the market is repricing the yen based on interest rate differentials and changing safe-haven dynamics.

Loose Fiscal + Loose Monetary Policy = Yen Under Pressure

The yen’s accelerated decline coincided with the appointment of new Prime Minister Sanae Takaichi.

The new government swiftly approved a ¥21.3 trillion stimulus package, with supplemental budgets further expanding fiscal spending. Such large-scale expansion inevitably increases government bond issuance, fueling market concerns over Japan’s debt sustainability.

As a result, 10-year JGB yields spiked to levels not seen since 2008, putting significant pressure on Japan’s bond market, which has long relied on low long-term rates for stability.

Meanwhile, monetary policy has offered little buffer. Takaichi openly opposes rate hikes, and the Bank of Japan remains mostly at the level of verbal interventions, giving no clear signal of normalization. In a context of expanding fiscal stimulus and suppressed interest rates, policy direction further weighs on the yen.

Safe-Haven Appeal Weakens: Yen’s “Cushion” Thins

A major reason for selling pressure on the yen is the structural weakening of its safe-haven status. Historically, capital would flow to the yen in times of risk, but that instinct is fading. When policy direction is highly uncertain, traditional safe-haven logic is offset by policy risk.

Market participants face a key question: if an external shock occurs, will Japan stabilize the yen through rate hikes or other measures? When this expectation is unclear, the yen’s original “cushion” diminishes.

Consequently, recent market behavior has been atypical: during periods of rising risk sentiment, the yen has not appreciated significantly, and at times, capital outflows or weak buying have been observed. The market, influenced by policy signals, is repricing the yen—from a traditional safe-haven asset to a low-yield funding currency.

Intervention May Curb Short-Term Declines, But Structural Weakness Persists

As USDJPY approaches 160, intervention discussions are heating up. Japanese authorities have repeatedly stated they would act if necessary to stabilize the currency. If the yen falls rapidly or faces speculative pressure, short-term intervention is almost inevitable.

However, fundamentally, the effect of intervention is limited. The core drivers of yen weakness remain the combination of loose fiscal and monetary policy, a high U.S.-Japan interest rate gap, and diminished safe-haven appeal. Without significant changes to these fundamentals, FX intervention alone cannot reverse the market’s medium- to long-term bearish pricing of the yen.

Even if intervention generates a short-term rebound, the market usually repositions the yen based on fundamentals once the “surprise effect” dissipates. Without accompanying policy adjustments, the yen is likely to return to a depreciation path.

December BOJ Rate Decision: Wages Are the Key

Currently, the market assigns roughly a 40% chance that the Bank of Japan will hike rates in December, while the probability of a Fed rate cut over the same period exceeds 80%. A narrowing U.S.-Japan interest rate differential could provide another source of support beyond intervention.

BOJ Governor Kazuo Ueda has repeatedly emphasized that he requires more empirical evidence of wage growth to justify a rate hike, while Japan’s largest labor union has proposed at least a 5% wage increase in 2026.

This provides a rationale for monetary normalization, while also making policy decisions more cautious: on one hand, upward pressure from wages and inflation; on the other, a need to avoid rate shocks to the real economy. The market balances these forces—if short-term rates cannot rise quickly while the U.S.-Japan spread remains wide, the yen is more likely to be used as a funding currency, keeping depreciation pressure high.

If the BOJ holds rates in December, USDJPY may test 160, with trading likely in the 155–160 range. The yen will continue serving as a funding currency, with pressure intact. If the BOJ opts to hike rates, the yen may see a short-term rebound, but its sustainability will depend on whether corporate profits and consumer data support higher rates.

Focus on the “Wage-Policy” Axis to Gauge Short-Term Volatility

Overall, the yen’s weakness reflects Japan’s current policy stance. The key to reversing yen trends is not verbal intervention or one-off capital moves but whether wage negotiations can firmly place Japan on a sustainable path of “wage growth—central bank rate hikes.”

If wages continue to rise steadily next year and the BOJ gradually raises rates as planned, the market may reintegrate the yen into the “interest rate differential logic,” creating conditions for structural recovery.

Conversely, as long as fiscal expansion intentions are clear, government bond supply pressure persists, and the BOJ cannot or will not tighten aggressively in advance, the yen will remain a low-yield funding currency facing ongoing depreciation pressure.

Until then, the yen will continue to be highly volatile and susceptible to policy shocks. Short-term appreciation will rely more on intervention or market events rather than fundamentals.