USD/JPY fell during Thursday’s Asian session, slipping to 158.70–158.65. It stayed near the weekly low seen on Tuesday after a softer US Dollar.
The US Dollar Index hovered near its lowest level since early March as markets reacted to ceasefire hopes and comments that the war with Iran was close to ending. Ongoing negotiation expectations reduced demand for the Dollar.
Oil And Policy Expectations
Crude Oil traded near a three-week low set on Tuesday, easing inflation concerns and lowering expectations for tighter Federal Reserve policy. The Yen gained some support from speculation that Japanese authorities may intervene to limit currency weakness.
Yen strength was limited by risks linked to the Strait of Hormuz and restricted shipping around Iran. Japan relies heavily on Middle East energy imports, and disrupted oil flows raised concerns about near-term pressure on Japan’s economy.
USD/JPY has moved within a familiar range for about a month, after pulling back from the mid-160.00s, the highest since July 2025, reached last month. With no major US data due, remarks from FOMC members were flagged as a potential driver for the Dollar.
The optimism we saw in late 2025 regarding a US-Iran ceasefire has faded, reigniting upward pressure on the USD/JPY. The pair is now testing the 159.50 level, stirring memories of the intervention fears that dominated markets when we approached the 160.00 mark last year. This tension suggests that volatility is likely to increase in the near term.
Rates Divergence And Intervention Risk
Recent data shows the US-Japan policy divergence is widening again, contrary to the narrowing trend observed in 2024 and 2025. Last week’s US Consumer Price Index for March 2026 came in hotter than expected at 3.1%, fueling expectations that the Federal Reserve will hold rates higher for longer. This has pushed the 10-year US Treasury yield back above 4.50%, a stark contrast to Japan’s benchmark yield, which remains pinned near 0.90%.
Meanwhile, Japan’s economic situation appears more fragile, validating the concerns we had about energy security back in 2025. Preliminary Q1 2026 GDP data showed a contraction of 0.2%, with high energy import costs from Middle East instability cited as a major factor. This weak growth makes it very difficult for the Bank of Japan to tighten policy, leaving the yen fundamentally vulnerable to carry trades.
The primary risk to a long USD/JPY position remains direct intervention from Japanese authorities, which could cause a sudden and sharp drop. We saw a brief intervention in February 2026 that pushed the pair down nearly 400 pips in a day, but the upward trend resumed within weeks. This history shows that while intervention is a threat, its effects may not be lasting against strong fundamental pressures.
Given the strong upward momentum but significant downside risk from intervention, we should consider strategies that offer upside exposure with limited risk. Buying USD/JPY call options with strike prices at or above the psychologically important 160.00 level appears prudent. This approach allows us to profit from a potential breakout while capping our maximum loss to the premium paid if authorities step in.
