The Japanese Yen's depreciation and interest rate hike expectations are competing. After breaking through 153, will it rise above 150 again?

Market expectations for the Bank of Japan’s rate hike are rising, becoming the main driver behind the yen’s strength. Recently, USD/JPY has been climbing consecutively, briefly breaking through the 153 level in mid-February, reflecting growing investor anticipation of tightening Japanese monetary policy. However, there are significant disagreements within the industry about whether the yen will continue to appreciate or face downward pressure.

Political Stability Eases Fiscal Concerns, Providing Policy Support for the Yen

The ruling coalition in Japan achieved an overwhelming victory in the recent general election, positively impacting the currency market. Prime Minister Sanae Takaichi then stated that they will not issue deficit bonds to finance measures to reduce consumption tax, alleviating market fears of excessive fiscal expansion. At the same time, Finance Minister Shigeyuki Kato explicitly indicated that measures, including direct intervention in the currency market, could be taken if exchange rate fluctuations deviate rapidly from fundamentals. These policy signals provide a dual support for the yen, stabilizing fiscal expectations and increasing government vigilance against abnormal currency movements.

Rate Hike Expectations Accelerate, Fueling Market Imagination of Yen Strength

According to the latest forecasts from U.S. banks, the Bank of Japan is expected to start raising interest rates as early as April, with a projected increase of 25 basis points—significantly earlier than the previous expectation of June. The early realization of rate hike expectations has strengthened the market’s anticipation of yen appreciation. [Source: TradingView; USD/JPY trend over the past three months] It is this rising rate hike expectation that has mainly driven USD/JPY from the 150 level up to 153.

Diverging Views Among Institutions: The Battle Between Downward Pressure and Upward Potential

Different institutions have provided contrasting forecasts for the future exchange rate of the yen, reflecting high uncertainty about this asset’s outlook.

Mizuho Securities believes that although the yen has shown short-term strength, the long-term trend of depreciation remains unchanged. They forecast USD/JPY could push toward the 160–165 range, indicating further risk of yen weakening.

Nomura Securities warns that Prime Minister Takaichi’s moderate stance after her election victory may only be temporary. The market might reprice expectations around her policies (“Takaichi trade”), leading investors to sell the yen further. Nomura’s analysis suggests that if USD/JPY approaches the 160 level, the risk of Japanese Ministry of Finance intervention in the currency market will significantly increase.

In contrast, Deutsche Bank adopts a more conservative stance. The bank has already closed its short yen positions and currently holds a neutral view on the currency. Deutsche Bank notes that more market-friendly policies may be introduced in the future, and previously promised consumption tax reductions could be delayed, adding variables to the exchange rate outlook.

Can the 150 Level Hold? Rate Hike Is Key, Multiple Variables to Watch

Some market participants believe that Japan’s rate hike in April is a certainty, which could further support yen appreciation, potentially pushing USD/JPY below the 150 mark. However, based on the differing views among institutions, whether the yen will continue its upward trend or face a reversal of depreciation depends on several complex factors—including actual central bank actions, changes in the global interest rate environment, and Japanese government interventions. In the short term, market expectations for the yen’s direction remain highly uncertain.