I recently noticed that the Japanese yen exchange rate has been moving in a rather interesting way. After the US dollar fell for seven consecutive days, it broke through the 159 level—yet the logic behind it is actually quite complex.

First, the fundamentals. Japanese Prime Minister Takashi Takai—recently said that Japan will need to add to its budget to deal with rising commodity prices caused by the Middle East conflict. This immediately highlighted a market pain point. The yield on Japan’s 30-year government bonds jumped straight to 4.2%, hitting a new high, and investors began to worry that Japan’s fiscal situation could deteriorate further. At the same time, expectations for Federal Reserve rate hikes are also building; the market is already pricing in one rate increase by March 2027, which further supports the US dollar. Under these dual pressures, the yen’s depreciation trend looks like it may continue.

What’s interesting is that Japanese authorities are not taking this lying down. In late April and early May, Japan intervened in the foreign exchange market, forcibly pulling the US dollar against the yen back from above 160 to around 155. At the G7 meeting, Finance Minister Kaetsu Shun-yu stated clearly that Japan is ready to respond at any time to excessive fluctuations in the foreign exchange market, and he specifically emphasized that during interventions, they would be cautious to avoid pushing up US Treasury yields.

But from an analyst’s perspective, intervention alone may not be enough. Lee Hardman of Mitsubishi UFJ Bank noted that factors such as a global bond market sell-off, rising US bond yields, and the Japanese government issuing new debt are working together to further intensify the weakness of Japanese government bonds and the downward pressure on the yen. Elias Haddad of Brown Brothers Harriman was even more blunt, saying that Japan has quietly approached a dangerous zone in the global bond market. However, he also added that as long as the deterrence effect of official exchange-rate intervention remains, the US dollar/yen should still be suppressed below 160 in the short term.

The key question is whether plain intervention can truly turn things around. Deutsche Bank’s view is very clear: intervention itself can’t save the yen; it must be paired with rate hikes by the central bank. The market understands this as well. The overnight swap market shows that investors currently estimate there is about a 77% chance that the Bank of Japan will raise rates in June.

So the current picture is this: the yen exchange rate is tugged back and forth between 159 and 160 under the combined effect of policy intervention and rate-hike expectations. To truly stabilize the exchange rate, it still depends on whether the central bank will actually act in June. This month’s Bank of Japan meeting could become a key turning point for the exchange rate.