USD/JPY climbed to around 162.30 on Monday, gaining 0.58% on the day as the pair extended its recovery from last week’s pullback. The rebound has brought the pair back within reach of the nearly four-decade high of 162.84 recorded last Wednesday, with sustained US Dollar strength continuing to weigh heavily on the Japanese Yen.
The Greenback remains well supported despite last week’s softer-than-expected US Nonfarm Payrolls report, which suggested some moderation in labor market conditions. Investors are reassessing the Federal Reserve’s policy outlook, but expectations that US interest rates will remain relatively high continue to underpin demand for the US Dollar. Additionally, escalating geopolitical tensions in the Middle East, particularly around the Strait of Hormuz, have reinforced safe-haven demand for the US currency.
A key driver behind USD/JPY’s upward momentum remains the significant interest rate differential between the United States and Japan. Higher US Treasury yields continue to encourage carry trades, where investors borrow in low-yielding currencies such as the Japanese Yen to invest in higher-yielding assets. Although the Bank of Japan has started gradually normalizing monetary policy, its benchmark interest rate remains far below those of other major central banks, limiting support for the Yen.
Despite the currency’s prolonged weakness, Japanese authorities continue to monitor foreign exchange markets closely. Government officials have reiterated their readiness to intervene if exchange rate movements become excessively volatile. While no intervention has occurred recently, traders remain cautious as some analysts believe Tokyo could opt for an unexpected market operation to curb speculative selling of the Yen.
Meanwhile, analysts at MUFG believe financial markets may be underestimating the Bank of Japan’s capacity to tighten policy further. They expect rising inflation and higher Japanese government bond yields to encourage additional rate increases, projecting the policy rate could reach 1.5% by January 2027, with the next hike potentially arriving in September.
HSBC also expects USD/JPY to remain elevated as long as the wide US-Japan yield gap persists. However, the bank cautions that Japan’s Ministry of Finance is likely to continue selective intervention efforts to limit excessive depreciation of the Japanese Yen.
Trade Idea: Buy USD/JPY above 162.40, targeting 163.00 and 163.50, with a stop-loss below 161.80. Strong US Dollar demand and the wide yield differential continue to favor further upside.