The dollar to Yen (USD/JPY) exchange rate strengthened to highs near 158.5 at the start of the week, maintaining pressure on the Japanese currency after another rise in US Treasury yields.

MUFG notes that the yen remains vulnerable in the short term, especially with energy prices rising again and global bond markets under renewed pressure.

The bank expects yield differentials to remain an important driver, particularly as markets continue scaling back expectations for Federal Reserve rate cuts.

In this context, MUFG expects USD/JPY to remain close to the upper end of its recent range, with the bank targeting a 157.00–160.00 range in the short term.

“Fundamental factors continue to favour further yen weakness and will keep pressure on Japan to intervene again to support the yen as the USD/JPY moves back closer to the 160.00-level.”

MUFG also notes that Japan’s fiscal position is attracting increased scrutiny following discussion of another supplementary budget package and rising long-dated Japanese government bond yields.

The bank considers that higher oil prices are an additional negative for the yen given Japan’s dependence on imported energy.

At the same time, volatility could increase sharply if markets begin testing the Japanese authorities’ tolerance for renewed yen weakness.

The bank still sees scope for periods of yen recovery over the medium term, particularly if geopolitical tensions intensify further or US economic data starts to weaken more materially.

In the short term, however, MUFG considers that the balance of risks still favours a higher USD/JPY pair.