USD/JPY hits the 157 level and reverses. The Bank of Japan's policy pace will dominate the dollar's trend in the second half of the year.

Government Intervention Expectations Rise, Yen Depreciation Trend Faces Turnaround

December 23rd, the unilateral upward trend of the US dollar against the yen showed a clear retreat. Market focus shifted to the intensive statements from Japanese government officials—Finance Minister Shunichi Suzuki warned that the government has flexibility to take significant action, and Deputy Finance Minister Masamura Jun later pointed out that recent exchange rate fluctuations have been excessively volatile, and official intervention will be carried out if necessary. The week prior, influenced by the dovish rate hike decision from the Bank of Japan, USD/JPY had risen to a recent high of 157.76.

The firm stance from government officials reversed market expectations. Traders generally believe that Japanese authorities are about to intervene, and this expectation itself exerts strong downward pressure. The period from Christmas to New Year has become an observation window for policy actions— as senior analyst Matt Simpson from StoneX pointed out, the period of market liquidity drying up creates the best conditions for official intervention. Simpson also stated that unless the exchange rate sharply breaks through the 159 level, the government may not need to act urgently, contrasting with the more aggressive stance during the more volatile period of 2022.

Divergence in BoJ Rate Hike Pace and Fed Policy Reshapes Exchange Rate Dynamics

The key to future trends lies in the mismatch between the policy cycles of the two major central banks. Charu Chanana, Chief Investment Strategist at Suncorp Bank, pointed out that Japan’s slow rate hike process combined with the Federal Reserve’s potential easing shift in 2026 suggests that the era of unilateral yen weakness may be over. The yen is more likely to fluctuate within a range in the future, with room for rebound when US Treasury yields decline or global risk appetite shifts.

However, the greatest risk remains: if US interest rates stay high while the Bank of Japan becomes more cautious again, the yen will continue to be under pressure. Chanana specifically mentioned the reference value of Japan’s wage negotiations in spring 2026— which could influence the central bank’s inflation outlook.

Divergence in USD Outlook in the Second Half of the Year, Rate Hike Delays Affecting the Whole Year

Market expectations for the timing of the Bank of Japan’s next rate hike vary. BOJ former Monetary Policy Committee member Makoto Sakurai predicts that the rate hike may occur in June or July 2026, while Sumitomo Mitsui Banking Corporation’s Chief FX Strategist Hiroshi Suzuki forecasts a delay until October. Since the window for rate hikes is still far away, Suzuki believes the exchange rate will remain biased toward depreciation during this period, with USD/JPY possibly reaching 162 in the first quarter of 2026.

Currently, the Bank of Japan has signaled a mild rate hike, but the pace is far below market expectations, leaving ample room for the dollar to rise in the second half of the year. Whether government intervention can change the direction remains uncertain, but from liquidity and policy timing perspectives, the long-term downtrend after a short-term rebound remains difficult to reverse.