The US Dollar to Yen (USD/JPY) exchange rate remains close to multi-decade highs and is trading around 159.90 after repeatedly testing the 160 level over recent weeks.

Rabobank expects the Japanese Yen to regain some ground over the medium term and has adjusted its six-month USD/JPY forecast to 155.00, although it stresses that any recovery depends on further hawkish signals from the Bank of Japan.

The US Dollar strengthened against most major currencies during May as markets increased expectations that the Federal Reserve could keep interest rates higher for longer.

Despite speculation over a June Bank of Japan rate hike and substantial intervention by Japan’s Ministry of Finance, the Yen remained one of the weakest G10 currencies.

Rabobank notes that support for tighter policy within the BoJ is growing. Several policymakers have expressed concern about inflation pressures, while Governor Ueda has suggested that temporary price shocks could become more persistent through their impact on wages and inflation expectations.

The bank also points to stronger-than-expected retail sales, labour market data and industrial production figures as evidence that the economy could withstand higher interest rates.

However, expectations of a June rate increase have done little to push USD/JPY away from 160, suggesting that policymakers may need to deliver a much stronger hawkish message if they want to support the currency.

Rabobank also highlights that Japan spent an estimated JPY11.7 trillion intervening in currency markets during May, underlining the scale of the challenge facing authorities.

While the bank expects USD/JPY to move lower over the next six months, it believes that a sustained Yen recovery will require continued Bank of Japan tightening and a reduction in the appeal of Yen-funded carry trades.