The strength of the US dollar suppresses the yen's rebound. The US dollar's trend in the second half of the year will determine the exchange rate fate.

The Japanese yen has recently experienced a slight respite, but whether this rebound can be sustained remains uncertain. Market expectations of imminent intervention by the Japanese government to influence the currency market are increasing, but the true determining factor may still be the direction of the US dollar in the second half of the year.

Sharp Exchange Rate Fluctuations Spark Policy Attention

Since December, the performance of USD/JPY has been quite dramatic. It first surged to a high of 157.76 on December 19 due to the dovish rate hike decision by the Bank of Japan, then on December 23, Japanese Finance Minister Shunichi Suzuki and Deputy Finance Minister Masamura Jun both made statements implying that the government is prepared to take necessary measures to address excessive volatility. These comments quickly reversed market sentiment, and expectations of yen appreciation rose accordingly.

However, market participants are divided on whether the government will actually intervene in the near term. Matt Simpson, senior market analyst at StoneX, believes that unless the exchange rate breaks through the 159 level and poses a substantial threat, the government may hold off for now. He mentioned that in 2022, when market volatility was even more intense, the market seemed to be “pressuring” the Ministry of Finance to act, but this time the sense of urgency is relatively lacking.

Nevertheless, if the government indeed decides to act during the liquidity-scarce window from Christmas to New Year, the impact of intervention could be amplified.

Central Bank Policies and the US Dollar’s Second Half Outlook Will Influence the Yen’s Future

The true underlying factor affecting the long-term trend of the yen may be deeper than government intervention — it’s the interaction between the Bank of Japan’s pace of rate hikes and the US interest rate environment.

Charu Chanana, Chief Investment Strategist at Saxo Bank, pointed out that Japan’s gradual rate hike cycle contrasts with the Federal Reserve’s potential easing policy in 2026. This combination suggests a reduced likelihood of unilateral yen depreciation, with more likely fluctuations within a range. When US Treasury yields decline or risk sentiment improves, the yen may even strengthen.

However, the biggest risk is that if US interest rates remain high in the second half of 2026 and the dollar continues its strength, while the Bank of Japan remains cautious, downward pressure on the yen could resurface.

Rate Hike Timeline Will Determine the Exchange Rate Ceiling

When the Bank of Japan will raise rates to 1% remains a key focus. BoJ former Policy Board member Seiji Sakurai predicts the rate hike window will be around June or July 2026, but Sumitomo Mitsui Banking Corporation’s chief FX strategist Hiroshi Suzuki believes it will be October 2026.

This timing difference is crucial. Suzuki stated that since rate hikes still require a considerable wait, the yen could easily depreciate toward 162 in the first quarter of 2026. In other words, if the US dollar remains strong in the second half, the yen will face further downward pressure.

The market generally expects the Bank of Japan to initiate the next round of rate hikes in the second half of 2026, but throughout the entire year before that, the yen may still be in a weak environment. Short-term government intervention can only provide temporary relief; the real turning point depends on the Federal Reserve’s policy and the specific performance of the dollar in the second half of the year.