Position and Upside Risk

In my view, intervention threats will continue to cap USD/JPY upside at 158. Meanwhile, JGB yields would likely bolster yen demand, indicating a negative price outlook. However, the BoJ’s neutral interest rate will be pivotal, given recent concerns about sticky US inflation.

A higher neutral interest rate level, neither accommodative nor restrictive, would indicate a more hawkish BoJ rate path and a narrower US-Japan rate differential. A narrower rate differential would make yen carry trades into US assets less profitable, reversing yen carry trades, sending USD/JPY toward 140 over the longer term.

However, upside risks to the bearish outlook include:

• Dovish BoJ chatter and a 1% neutral interest rate.
• Strong US data.
• Hawkish Fed rhetoric.

These scenarios would weaken the yen and boost demand for the US dollar, sending USD/JPY higher. However, yen intervention warnings are likely to cap the upside at around the 158 level, based on the latest communication.

Read the full USD/JPY forecast, including chart setups and trade ideas.

Conclusion: Focus on the BoJ Neutral Rate

In summary, USD/JPY trends reflect the Japanese government’s focus on forex markets and changing sentiment toward narrowing rate differentials. Market focus will remain on BoJ Governor Ueda and the Fed’s outlook on monetary policy and the BoJ’s view on the neutral interest rate.

A 1.5% to 2.5% neutral rate would indicate more aggressive BoJ rate hikes, supporting the bearish short- to medium-term outlook for USD/JPY. Furthermore, dovish Fed rhetoric will likely send USD/JPY toward 140 in the 6-12 month time horizon.

For more in-depth analysis, review today’s USD/JPY trading setups in our latest reports and consult the economic calendar.