The depreciation of the Japanese Yen hits the 158 level! Central bank policies and fiscal stimulus intensify exchange rate volatility

Policy Contradictions Behind the Yen’s Sharp Decline

Last week, the foreign exchange market was volatile, with USD/JPY rising by 1.28%, approaching the 158 level, sparking widespread concern over potential Japanese government intervention. The significant depreciation of the yen is not solely due to market factors but stems from inherent conflicts between the Bank of Japan and government policies.

The Bank of Japan raised interest rates by 25 basis points as scheduled, seemingly tightening policy, but Governor Ueda Kazuo’s dovish statements dampened market expectations of further rate hikes. To make matters worse, Prime Minister Sanae Takaichi’s cabinet approved a massive fiscal stimulus plan totaling 18.3 trillion yen, directly offsetting the effects of the rate hike and shaking market confidence in Japan’s monetary policy outlook.

US Dollar Index Strengthens, Non-USD Currencies Show Divergence

Last week (12/15-12/19), the US Dollar Index rose by 0.33%, maintaining relative strength, while non-USD currencies diverged. The euro fell by 0.23%, the Australian dollar declined by 0.65%, and the British pound rose slightly by 0.03%, with the 1.28% drop in the yen particularly notable.

This pattern reflects a reassessment of the Federal Reserve’s policy expectations in the global currency markets. Despite November CPI data being below expectations and mixed non-farm employment figures, investment banks like Morgan Stanley and Barclays pointed out that the data are heavily affected by technical distortions and statistical biases, making it difficult to accurately reflect economic trends. Based on this, market expectations for a rate cut by the Fed in 2026 remain moderate, with two rate cuts projected for the year, and a 66.5% chance of a cut in April.

Divergent Forecasts from Major Institutions on Yen Outlook

Regarding the future trend of the yen, forecasts vary significantly among major institutions. Sumitomo Mitsui Banking Corporation is pessimistic, predicting the yen exchange rate could depreciate to 162 in Q1 2026, citing that the next rate hike by the Bank of Japan will be delayed until October 2026, with no clear timeline for a hike.

In contrast, JPMorgan issued a warning: if the yen depreciates beyond 160 in a short period, it will be considered a sharp exchange rate movement, and the Japanese government is highly likely to intervene. This suggests that around 158 has become a sensitive zone for government intervention.

Nomura Securities adopts a more balanced stance, believing that under the Fed’s rate cuts, the US dollar will continue to weaken, making it difficult for the yen to depreciate significantly. They forecast the yen will appreciate to 155 in Q1 2026, contrasting sharply with Sumitomo Mitsui’s prediction of 162.

Euro Outlook: Narrowing Interest Rate Gap Supports Bullish Sentiment

On the other hand, EUR/USD rose and fell last week, ending down by 0.23%. The European Central Bank maintained interest rates as expected, but President Lagarde’s comments did not align with the previously hawkish market expectations.

Most institutions are optimistic about the euro’s future performance. Danske Bank pointed out that with the Fed cutting rates and the ECB holding rates steady, the real interest rate differential between the US and Eurozone, adjusted for inflation, may narrow. This convergence of interest rates is favorable for euro appreciation. Additionally, the recovery of European asset markets, increased hedging demand against dollar weakness, and declining confidence in US institutions will support the euro.

Technical Analysis and Short-term Opportunities

Technical outlook for the yen’s sharp decline:

USD/JPY has broken above the 21-day moving average, and MACD indicates a buy signal, forming a bullish pattern. If the price can effectively break through the 158 resistance level, it could open up further upside potential. Conversely, if the yen remains under pressure below 158, the likelihood of a correction increases, with technical support around 154.

Technical opportunities for EUR/USD:

EUR/USD remains above multiple moving averages, maintaining the potential for further gains in the short term, with the previous high near 1.18 serving as a key resistance. If a pullback occurs, the 100-day moving average around 1.165 will be a critical support level.

Key Focus for This Week

Regarding the yen’s trend, close attention should be paid to speeches by Bank of Japan Governor Ueda Kazuo and any verbal intervention signals from Japanese authorities. If Governor Ueda adopts a more hawkish tone or verbal intervention escalates, USD/JPY could face downward pressure.

For the euro, US Q3 GDP data and geopolitical developments will be decisive factors. Better-than-expected GDP data would favor the dollar and pressure EUR/USD; conversely, weaker data would support the euro.