Yen bears are finding support from global inflation dynamics, and they may expect Japanese policymakers may be more tolerant of currency weakness as a result.

USD/JPY’s break to two fresh year-to-date highs following central bank meetings this week signals renewed upside potential after a long stretch of consolidation, during which implied volatility and the average true range fell to the lowest level since 2022. The pair is underpinned by rising short-term Treasury yields after unexpectedly hawkish comments about inflation from Fed Chair Kevin Warsh, alongside similar concerns voiced by the Bank of England, even as oil slides to a three-month low and shares advance. DXY pushing to a one-year high above its upper Bollinger on short-covering adds to the bullish bias.

Despite the move, Japanese officials have offered only limited verbal resistance. Chief Cabinet Secretary Minoru Kihara said authorities can act “at any time,” while noting a weaker yen supports corporate profits but raises costs for firms and households. While MOF officials may comment on FX before the weekend, the subdued tone from Kihara suggests intervention may not be imminent, even as yen shorts stretch, with dollar strength driven by Fed policy divergence.

Option convexity points to a choppy but still upward-biased move, with scope to test the 2024 high of 161.96 even as yen shorts employee options to hedge. The key concern for officials may be the psychological normalization of the 160 level, which could open the door to a deeper move toward the November 1986 high near 165 as it retraces a multi-decade decline. A close below 160 would help change this developing mindset.
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(Robert Fullem is a Reuters market analyst. The views expressed are his own.)