FX.co ★ USD/JPY. Caution, Intervention!

The USD/JPY pair has been testing the resistance level of 162.70 (the upper Bollinger Bands line on D1, coinciding with the upper BB line on W1) for the third consecutive week, reflecting the ongoing weakness of the Japanese currency. For three weeks straight, traders have been attempting to approach the boundaries of the 163 figure, but so far without success. Notably, even during periods of decline in the dollar index, USD/JPY buyers remain quite confident, using almost any significant pullback as an opportunity to open long positions.

In my opinion, the resilience of the pair can be explained by the fact that the market has stopped perceiving it solely as a derivative of the greenback's dynamics. In recent weeks, the main driver of growth has been not so much the dollar as the yen's structural weakness. Therefore, even on days when the DXY declines, the USD/JPY pair either holds its previous positions or retraces very slightly.

If we consider the specific reasons for the pair's behavior, we can highlight several factors.

First, the market, in my view, has almost abandoned expectations of further tightening from the Bank of Japan. Just a few months ago, investors hoped to see at least one or two rate hikes by the end of the year, but now those expectations have been significantly adjusted. Japan's economy continues to show weak domestic demand, real incomes remain under pressure, and recent macroeconomic reports signal a slowdown in business activity. In these conditions, the Bank of Japan has little room for further interest rate hikes — at least in the near term.

The second reason for the "stress resilience" of USD/JPY buyers is the widening yield differential between the United States and Japan. Even with some dollar weakening (especially after the weak CPI and PPI growth reports in the U.S.), the yield on Japanese government bonds remains significantly lower than that of American bonds. If the yield on 10-year U.S. Treasuries only retraces slightly, while the yield on JGBs remains virtually unchanged, the attractiveness of dollar assets compared to Japanese ones remains largely unaffected.

The third reason, largely stemming from the previous ones, is the continued attractiveness of the carry trade strategy. Even if the market begins to factor in a softer trajectory for Federal Reserve policy, the cost of funding in Japan remains so low that investors are still actively using the yen as a funding currency. In other words, they continue to sell JPY and direct the raised funds into higher-yielding assets, which automatically supports demand for USD/JPY.

There is also another important point contributing to the growth of the pair. The market has practically stopped taking the threat of currency intervention by Japanese authorities seriously. As soon as the pair approaches the upper boundary of the established price range (i.e., in the area of 162.60 – 162.70), representatives of the Ministry of Finance of Japan announce verbal interventions, but the market has "built up an immunity" to such verbal signals. For example, today, Finance Minister Satsuki Katayama reiterated that authorities are prepared to take "decisive measures" if necessary. However, the market's reaction was practically zero. The pair continued trading around 162.30 – 162.50, close to multi-year highs. This again indicates that market participants no longer perceive such statements as signals for immediate intervention. Furthermore, in recent months, Katayama has repeatedly used nearly identical phrases ("ready to act," "will take appropriate measures," "prepared for decisive action," etc.). The regular repetition of such statements has significantly reduced their effectiveness—the market has essentially stopped viewing them as signals for immediate government action. Thus, we are observing a classic example of the diminishing effect of verbal interventions. Until clear signs of preparation for large-scale currency interventions emerge, market participants are likely to continue buying USD/JPY after each notable pullback.

Moreover, even if Japanese authorities intervene, long positions will remain a priority. A large-scale currency intervention can only temporarily strengthen the yen, since its fundamental "weaknesses" (the interest rate gap between the U.S. and Japan, the retention of carry trade attractiveness, and the wait-and-see stance of the Japanese central bank) will persist.

Thus, the current fundamental backdrop favors further USD/JPY growth. However, the pair's immediate proximity to the potential intervention zone of the Japanese authorities significantly increases the risk of sharp downward movements. Corrective pullbacks should be viewed as opportunities to open long positions, but in the area of 162.60 – 162.70, it makes sense to take profit, as approaching the boundaries of the 163 figure significantly raises the chances of a real currency intervention by Japanese authorities.