UBS continues to hold a neutral outlook on the Japanese yen, citing the ongoing divergence between Federal Reserve and Bank of Japan policies, and expects the USD/JPY exchange rate to remain elevated in the coming years
The Japanese yen has faced renewed scrutiny in global currency markets as policy differences between the Federal Reserve and the Bank of Japan continue to shape its trajectory. Despite recent joint foreign exchange intervention that briefly supported the yen, UBS has reiterated its neutral stance on the currency, emphasizing that the underlying forces driving the USD/JPY exchange rate remain largely unchanged.
According to UBS, the intervention provided only temporary relief for the yen, which has struggled against the US dollar amid a persistent policy gap. The Federal Reserve has maintained a hawkish tone, signaling that US interest rates are likely to stay higher for longer, while the Bank of Japan has only gradually begun to tighten its own monetary policy. This divergence has kept upward pressure on the USD/JPY pair, with the yen remaining near multi-decade lows against the dollar.
Policy Divergence Limits Yen Recovery
UBS analysts argue that a sustained reversal in the USD/JPY trend would require a combination of softer US economic data-potentially prompting the Federal Reserve to ease its stance-and a more assertive approach from the Bank of Japan to restore confidence in the yen's stability. Until such conditions materialize, the firm expects the yen to remain under pressure, with the USD/JPY pair likely to trade in an elevated range.
Recent data underscores the scale of the yen's depreciation. In 2024, the USD/JPY exchange rate climbed above 155, reaching levels not seen since the late 1980s. While coordinated intervention by Japanese and international authorities briefly pushed the rate lower, the effect proved short-lived. UBS forecasts that the USD/JPY could reach 160 by the end of 2026 and remain close to that level into mid-2027, reflecting the expectation that the policy gap will persist for some time.
Market Outlook and Risks
UBS's outlook is shaped by the view that the Bank of Japan's gradual policy normalization is unlikely to close the gap with US rates quickly. The firm notes that unless the US economy slows more than expected or the Bank of Japan accelerates its tightening, the yen's recovery will be limited. This perspective is echoed by other analysts, who warn that further yen weakness could test the resolve of policymakers and potentially trigger additional intervention if volatility increases.
For context, the significance of the 160 level for USD/JPY has been widely discussed. As explored in an earlier analysis of the potential consequences of a USD/JPY break above 160, a move beyond this threshold could further erode confidence in Japan's currency policy and raise new challenges for both domestic and international stakeholders.
Understanding Currency Intervention
Currency intervention refers to official actions by central banks or governments to influence the value of their currency in the foreign exchange market. Such interventions can take the form of direct market transactions, coordinated efforts with other authorities, or verbal signals intended to shape market expectations. In the case of the Japanese yen, intervention has historically been used to counter rapid depreciation or excessive volatility, but its effectiveness often depends on the underlying economic and policy context. When policy divergence between major central banks is pronounced, as it is now, intervention may provide only temporary relief unless accompanied by broader shifts in monetary policy or economic fundamentals.
