By Linh Tran, Market Analyst at XS.com
USDJPY is currently trading around the 155.5 level. While this remains a relatively high price, the pair has already undergone a correction from its previous peak near 159.5. At one point, USDJPY slid back toward the 152 area before rebounding to its current level.
The sharp and rapid movements seen in USDJPY recently indicate that the market is no longer reflecting only the economic divergence between the United States and Japan, but is also increasingly pricing in policy risks and volatility risks related to the Japanese yen.
In the United States, the Federal Reserve is maintaining its policy rate within the 3.50%–3.75% range following the rate-cut cycle in 2025, while continuing to adopt a cautious stance toward inflation. Although the Fed is no longer in an aggressive tightening phase, the current level of U.S. interest rates remains high by long-term historical standards and is still noticeably higher than those of many other developed economies.
Nevertheless, the U.S. dollar has recently faced a significant bout of weakness, with the Dollar Index (DXY) falling to around 95.2 at one point, its lowest level since February 2022. This decline reflects the market’s reassessment of policy prospects as well as political and fiscal risks, prompting defensive and diversification-driven capital flows that have weighed on the dollar.
On the other hand, the Bank of Japan has officially exited its zero-interest-rate policy, with the policy rate currently at around 0.75%, the highest level in nearly three decades.
As USDJPY approached its 52-week highs, purely economic factors began to collide with policy constraints. A prolonged period of yen weakness not only affects the exchange rate itself but also has direct implications for Japan’s domestic economy through the import channel. Japan is highly dependent on energy and food imports, and a weaker yen raises living costs, increasing cost-push inflation pressures on households. This is why Japanese officials have repeatedly emphasized close monitoring of the foreign exchange market and warned against “excessive” currency moves. These factors, combined with the recent broad-based weakness of the U.S. dollar, have temporarily supported a recovery in the yen against the dollar.
The combination of U.S. dollar weakness, the BOJ’s rate hikes, and Japanese officials’ expressed concerns over exchange-rate developments has helped strengthen the yen in the short term. As a result, USDJPY retreated toward the 152 level before recovering to around 155.5 at present.
However, compared with the United States, Japan’s interest-rate level remains generally low. At the same time, the BOJ continues to proceed very cautiously, as it is concerned that raising rates too quickly could harm domestic growth, which has been structurally weak for many years. For now, these concerns have been conveyed mainly through official statements rather than through concrete intervention actions. Therefore, despite a historic policy shift, the U.S.–Japan interest-rate differential remains wide enough to continue exerting downward pressure on the yen over the medium to long term.
This policy divergence is quickly reflected in global capital flows. The yields on U.S. dollar-denominated assets, from government bonds to short-term money-market instruments, remain more attractive than those on yen-denominated assets. This continues to support carry-trade strategies, whereby investors borrow the low-yielding yen to invest in U.S. assets. This mechanism has been a key factor keeping USDJPY at elevated levels for an extended period, despite the BOJ’s rate hikes, as evidenced by the pair’s consecutive rebounds in recent trading sessions.
That said, caution is warranted. In an environment where policy risks are increasing, carry-trade strategies are becoming more sensitive to short-term exchange-rate volatility.
From a broader perspective, USDJPY is currently facing a pronounced tug-of-war between two forces: the interest-rate differential, which still favors the U.S. dollar, and the risk of potential currency intervention, which could emerge at any time.
Although official data show that Japan has not conducted actual foreign-exchange intervention in the recent period, this does not diminish the role of intervention risk in shaping market behavior. For USDJPY, expectations of possible action by the Japanese government alone are sufficient to make carry-trade flows more cautious. This helps explain why USDJPY can experience sharp short-term volatility even when underlying fundamentals such as interest-rate differentials remain largely unchanged.
From my personal perspective, the U.S. dollar still has fundamental support from relatively higher interest rates and yields. However, the scope for further upside in USDJPY is increasingly dependent on how much yen weakness Japan is willing to tolerate. In this context, the current movements in USDJPY should be viewed as a rebalancing phase and an entry into a sensitive period, rather than the beginning of a clearly defined upward or downward trend.