Japanese Yen Exchange Rate Reversal Imminent: US-Japan Policy Signals Trigger Short Covering Wave

The coordinated actions between the Federal Reserve and the Bank of Japan are gradually coming to light. On January 26, the USD/JPY exchange rate broke through 154, reaching a recent high. What is driving this? The market generally believes that behind this rapid appreciation lies positive signals from both U.S. and Japanese policy authorities.

According to market sources, on January 23, the New York Federal Reserve proactively called major financial institutions to inquire about USD/JPY exchange rates. This seemingly routine call was interpreted by traders as a prelude to the U.S. assisting Japan in managing the currency market.

Policy Signals Released: Yen Bears Face Liquidation Pressure

Joint intervention in the foreign exchange market by multiple countries is extremely rare in international financial history. Data shows that since 1985, such coordinated actions have only occurred six times, usually in response to major shocks like the Asian financial crisis, the Great East Japan Earthquake, or involving broad multi-currency cooperation, such as the famous Plaza Accord and Louvre Accord.

Japanese Prime Minister Sanae Takaichi announced on January 23 the dissolution of the House of Representatives and the early general election, with results to be announced on February 8. Her tax cut promises have sparked concerns about Japan’s fiscal health, pushing long-term Japanese government bond yields to historic highs. This fiscal pressure and yen depreciation form a vicious cycle, prompting both the U.S. and Japan to accelerate policy coordination.

Evercore ISI economist Krishna Guha stated: “In the current situation, U.S. involvement in forex market stabilization makes sense. Both sides aim to prevent excessive yen weakness and stabilize Japanese bond market expectations.” He further noted, “Even if the U.S. does not take substantial intervention actions, such policy signals alone can trigger rapid unwinding of yen short positions.”

Rare Historical Coordination: When Will the Yen Stop Falling?

What are the true intentions behind U.S.-Japan policy coordination? Spectra Markets senior forex trader Brent Donnelly believes the most direct path is for Japan’s Ministry of Finance to take actual intervention measures afterward. He also mentioned a low-probability scenario: the U.S., Japan, and South Korea might reach a consensus to jointly stabilize exchange rates if the yen and won depreciate excessively.

Based on these potential policy directions, Donnelly predicts a gradual downtrend for USD/JPY. Kazuya Inokuchi, senior strategist at Lisona Holdings, agrees, noting that the previous yen depreciation momentum has begun to ease. “Market focus will shift to USD/JPY fluctuations within the 150–155 range, which will become a key level for policy departments to defend.”

Diverging Expectations: Key Variables in Yen’s Future

However, not all institutions are confident in a yen rebound. Goldman Sachs analysts adopt a more cautious stance, stating: “Unless the Bank of Japan adopts a more hawkish stance or initiates quantitative easing to stabilize bond expectations, the yen and Japan’s bond market will continue to face downward pressure.”

This view reflects market concern over the Bank of Japan’s policy direction. The future of the yen depends not only on the strength of forex interventions but crucially on the BOJ’s own monetary policy stance. The current U.S.-Japan policy coordination is superficial; the real determinant of the yen’s medium-term trend will be the BOJ’s balancing act among inflation, bond market stability, and economic growth.