Recently, the USD/JPY market has been seeing some interesting changes again. I just saw USD/JPY rise to 157.95—continuing its upward streak for 4 straight days—and it’s now on the verge of testing the key level at 158. The Japanese authorities certainly can’t sit still, and the market is speculating whether they will intervene again.

Let’s review the history. Japan has indeed stepped in multiple times. On April 30, USD/JPY dropped directly from 160.7 to 155.5, and on May 6 it was again knocked down—from 157.9 to 155—both times with Japan’s finance authorities in the background. If this time the upward move continues, the Japanese government will likely lower its defense level from around 160 to around 158.

Why is the USD/JPY so prone to depreciation? I think there are mainly two factors. First is the interest-rate differential. The U.S. interest rate is currently 3.5%-3.75%, while Japan’s is only 0.75%, a gap of nearly 3 percentage points. Such a differential keeps encouraging arbitrage traders to sell the yen continuously, putting sustained pressure on it. Second is the trade deficit. The situation involving the U.S. and Iran has pushed up crude oil prices, inflation then rises as well, and this directly hits Japan—a country highly dependent on energy imports. As the trade deficit widens, the yen becomes even easier to sell.

From the data, if Japan truly deploys its foreign exchange reserves and returns to the historical lows seen between 2022 and 2024, Citibank’s research estimates that the total “ammunition” could reach 30 trillion yen. That sounds like a lot, but Toshiaki Kinuie of Nomura Research Institute points out a problem: intervention can only temporarily distort supply and demand. If Japan doesn’t address the structural issues that are driving the yen’s depreciation, then USD/JPY touching 160 could become the norm.

Over the long term, with inflation, interest rates, and growth all relatively strong, it is highly likely that the U.S. dollar will enter an upward channel. This means USD/JPY could continue to rise again. Rather than expecting intervention to completely reverse the situation, it may only serve to delay the depreciation process. What’s interesting is that this logic may also provide insights for other currency pairs.