Will the Japanese Yen continue to fall? The tug-of-war between interest rate hike expectations and depreciation pressure

The Japanese yen has recently experienced three consecutive increases, breaking through the 153 level, and market discussions about the yen’s future trend have become heated. How strong is the support for the yen’s upward movement? Will the yen fall again? These are the most concerned questions for investors. Currently, the yen faces an interesting contradiction: on one side, expectations of interest rate hikes by the central bank continue to rise; on the other side, Japan still faces long-term depreciation pressure. These two forces are engaged in a fierce tug-of-war.

Policy Shift Becomes an Important Support for Yen Rebound

Earlier this month, the ruling coalition won an overwhelming victory in Japan’s general election, bringing political positive signals for the yen. Newly elected Prime Minister Sanae Takaichi explicitly stated that she would not fund consumption tax cuts by issuing deficit bonds, effectively easing market concerns about excessive fiscal expansion in Japan. At the same time, Japanese Finance Minister Shigeyuki Kato also signaled that he would closely monitor exchange rate fluctuations and may intervene if rapid movements depart from fundamentals.

The clarity of policy has given the yen a boost. Market participants are re-evaluating Japan’s economic outlook and are full of expectations for subsequent central bank actions.

Rate Hike Expectations Become a Key Turning Point for Yen Movement

The rising expectation of rate hikes has become the core driver of yen appreciation. The latest forecasts from U.S. banks indicate that the Bank of Japan will implement a 25 basis point rate hike in April, two months earlier than previous expectations of June. This shift reflects a renewed recognition of Japan’s inflation situation and the central bank’s policy resolve.

The early expectation of rate hikes has two key effects: first, attracting international capital to reallocate exposure to yen assets; second, changing market expectations of actual yen yields. Amid ongoing global liquidity uncertainties, the rate hike expectation has become a rare positive factor for the yen.

Institutional Opinions Vary: Divergence on Yen’s Future Positioning

However, there remains significant disagreement within the market about whether the yen can continue to strengthen.

Mizuho Securities believes that the long-term depreciation trend of the yen has not changed, and the exchange rate could move toward the 160-165 yen range, meaning the yen will continue to weaken. Nomura Securities is more cautious, suggesting that although the political environment is easing, the market could restart “Takaichi trading,” further selling off the yen. Nomura also pointed out that if USD/JPY approaches the 160 level, the risk of intervention by Japan’s Ministry of Finance will significantly increase, becoming a major resistance to yen appreciation.

Deutsche Bank holds a different stance. The bank has closed its previous short yen positions and is now neutral on the yen. Deutsche Bank believes that more favorable policy measures may be introduced in the future, and the previously promised consumption tax cuts could be delayed, all of which suggest potential for a yen rebound.

More optimistic institutions believe that the April rate hike is a certainty, and the yen will eventually break through the 150 level, achieving significant appreciation.

Technical Levels Determine Future Trend

Returning to the core question—will the yen fall again? The answer may be more complicated than expected. Currently, the exchange rate hovers around 153, with 150 and 160 forming a critical range. Downward, 150 is a support level and a key psychological threshold; upward, 160 is a resistance level and a sensitive line for potential intervention by Japan’s Ministry of Finance. Whether the yen can ultimately stabilize depends on whether rate hike expectations can overcome long-term structural depreciation pressures and how strong the policy intervention will be.

In the short term, rate hike expectations and political support provide opportunities for the yen to rise; in the medium term, actual central bank actions and Japan’s economic data will be decisive factors; in the long term, the interest rate differential between Japan and the U.S. and their relative economic performances are the fundamental drivers of the yen’s trend.