USD/JPY has spent much of the past week hovering between 158.50 and 159.50, trading mostly around the 159.00 level. The pair is showing a similar pattern again today, even as the dollar starts the new week on a softer note. While the dollar is showing some signs of weakness, the yen remains under pressure and the broader fundamental backdrop is largely unchanged.

The main difference at this stage is that the intervention risk now appears more pronounced. That is keeping USD/JPY price action tense, especially as a move closer to 160 could raise the chance of another potential joint intervention. The area around 160 has historically been a trigger point for Tokyo: Japanese authorities stepped in repeatedly during 2024 as the pair traded around those levels, although in earlier episodes investors were typically quick to fade the official action once the initial shock passed. Even so, all else being equal, the path of least resistance still appears to point toward a weaker yen.

That backdrop is helping keep analysts split on where the Japanese currency goes next.

BofA had previously argued that USD/JPY had a good chance of moving back toward 149 by year-end, as noted here. However, the bank now says the balance of risks is starting to move against that view:

"More than a week has passed since the joint US-Japan FX Intervention. So far, the operation appears relatively successful as, compared with previous episodes, investors have been reluctant to fade the rally. Indeed, the authorities' strong commitment and the high cost of failure have strengthened our bullish conviction on the JPY, and we recently revised our year-end USD/JPY forecast to 149 from 152.

However, our quant signals raise some red flags for near-term JPY strength. Last week we saw an aggressive mean reversion in JPY skew, and option flow moved strongly in favor of JPY puts vs EUR and AUD, indicating that investors are moderating their worries on further upside. Additionally, our technical matrix has yet to trigger any positioning trend signals, while up/down vol and residual skew indicate that positioning and short-term sentiment are not yet supportive of the uptrend. Finally, our time-zone analysis indicates that JPY buying was not broad-based last week, with USD/JPY finding consistent support during US trading hours"

Goldman Sachs, meanwhile, argues that yen shorts could continue to unwind further if the right conditions emerge. The stakes reach beyond the currency itself. With Japanese interest rates sitting far below those in the US and Europe, the yen has long served as a key funding currency for global carry trades, and rapid yen appreciation can force those leveraged positions to unwind at speed — the July-August 2024 episode coincided with a burst of volatility across global markets:

"Japan's largest FX intervention in 15 years forced a sharp reduction in tactical JPY carry positions- even bigger than the initial unwind after the July 2024 operations. But the less JPY-positive macro backdrop likely in part explains why USD/JPY has already reversed nearly half of its initial decline.

Despite the significant drop in speculative positioning, more unwinds can follow if the right conditions align. Positioning could even flip net long if the macro and market backdrop argues for a stronger JPY, as it did in July-August 2024. Recession risk is much lower today than in the summer of 2024, and a bullish shift in JPY sentiment often requires the emergence of growth concerns.

But markets now view a September Bank of Japan hike as roughly 75% likely, and a faster pace of hikes could keep the JPY stronger for longer without a shift in the global growth backdrop."

That final point is notable, although it is not necessarily as strong a case for yen support as it may first appear. As discussed previously, BOJ rate hikes may not be enough to materially change the broader yen outlook unless the central bank takes a far more aggressive approach. Part of the reason is simple arithmetic: even under a faster tightening path, Japanese policy rates would still sit well below US equivalents, leaving the interest-rate differential that has weighed on the yen largely intact.

JP Morgan also does not see BOJ rate hikes as a game changer for the currency:

"Rate hike expectations have increased not only at the front-end but also further out the curve. However, this has not translated into yen appreciation; instead, the relationship between BOJ hike expectations and JPY has become a negative correlation.

Our Japan economists have revised their forecast to reflect a somewhat faster tightening pace by the BOJ, expecting the policy rate to reach 2% by end-2027. However: (1) a move to 2% is already largely priced in, and (2) the negative correlation between BOJ hike expectations and JPY is likely to persist for the time being.

Therefore, we think that a faster BOJ hiking path will only have a limited impact on our medium-to-long-term yen-weakness view. We keep our year-end USD/JPY target unchanged at 164."