Nomura expects USD/JPY to remain in a 162.00–165.50 range as rising US yields and Fed expectations support the US Dollar, although the risk of Japanese currency intervention is increasing as the pair approaches fresh multi-decade highs.

The US Dollar to Japanese Yen exchange rate is expected to remain elevated in the near term, with Nomura arguing that strong US fundamentals and higher Treasury yields continue to outweigh growing intervention risks from Japanese authorities.

USD/JPY has climbed back towards the 164 level, close to its highest levels since the 1980s, as rising oil prices, resilient US economic data and renewed expectations of further Federal Reserve tightening have boosted demand for the Dollar.

Nomura believes those factors should keep the pair trading within a 162.00 to 165.50 range, although it warns that official action becomes increasingly likely if the exchange rate pushes higher.

The Japanese Yen has weakened against the US Dollar over recent weeks as higher US yields have widened interest-rate differentials.

According to Nomura, markets are effectively testing Japan’s tolerance for further Yen weakness.

The bank notes that although Finance Minister Katayama has reiterated that authorities stand ready to take “decisive action whenever necessary”, verbal warnings have yet to intensify significantly and there has been no evidence of fresh currency intervention.

Instead, investors remain focused on the widening gap between US and Japanese interest rates.

Higher crude oil prices have also weighed on the Yen by worsening Japan’s import bill, while stronger-than-expected US labour-market data have reinforced expectations that the Federal Reserve may need to keep monetary policy restrictive for longer.

Nomura believes those forces continue to favour Dollar strength despite the growing political sensitivity surrounding Yen depreciation.

MUFG shares a similar view, arguing that persistent US rate-hike expectations remain the dominant driver of USD/JPY.

The bank said stronger US inflation risks and resilient employment data have pushed Treasury yields higher, offsetting expectations that the Bank of Japan will continue gradually normalising policy.

Bank of Japan Signals Could Be Key for the Yen

Attention now turns to this week’s Bank of Japan policy meeting, where rates are widely expected to remain unchanged.

Nomura says any indication that policymakers are becoming more willing to raise rates at the September meeting could help stabilise the Yen by narrowing expected policy divergence with the Federal Reserve.

The bank also believes markets will closely watch Governor Ueda’s press conference and any changes in the voting pattern for clues that the BOJ is becoming less tolerant of above-target inflation.

Goldman Sachs likewise expects the BOJ to leave policy unchanged, with investors instead focusing on the latest Tokyo inflation figures and industrial production data for guidance on the timing of future tightening.

For now, however, the US Dollar continues to enjoy a substantial yield advantage.

Nomura expects that to keep USD/JPY supported within its projected 162.00–165.50 range, while warning that any move towards the upper end of that band could significantly increase the likelihood of intervention by Japanese authorities.

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