USD/JPY forecast as Japan mulls yen intervention amid the sell-off

The Japanese yen continued its downtrend this week, raising the possibility that the Bank of Japan (BoJ) will intervene as it nears a crucial level. The USD/JPY exchange rate was trading at 159.60, a few points below the all-time high of 161.95. It has soared by over 14.3% from its lowest point last year.

Why the Japanese yen is in a downward trend 

The Japanese yen has retreated in the past few weeks as investors reacted to the ongoing Iran war, which will have an impact on Japan, a country that depends mostly on oil imports from the Middle East.

Analysts believe that Japan’s economy will come under substantial strains in the foreseeable future as the war is expected to continue in the coming weeks or months. 

In a statement on Truth Social, President Donald Trump said that he was extending his offer to Iran by another 10 days. If a deal is not be reached by then, he has threatened to bomb all Iran’s power plants, a war crime.

Still, war analysts believe that the pause is meant to give the Pentagon more time to amass troops in the region. According to the Wall Street Journal, Trump is deploying over 10,000 troops to the Middle East. A Polymarket poll shows that odds of a ground invasion have jumped recently.

Therefore, the most likely scenario is where the war continues for longer, a move that will affect the Japanese economy in the foreseeable future.

These fears explain why investors are dumping Japanese bonds and stocks. The most recent results data shows that the foreign investors sold government bonds worth over ¥635 billion last month, down from the previous ¥986 billion.

Similarly, foreign investors dumped over ¥2.5 trillion worth of Japanese stocks last month, higher than the previous month's ¥1.7 trillion. This explains why the Nikkei 225 index has plunged. Increased selling by foreign investors often leads to more pressure on the local currency.

Therefore, there is a likelihood that the Bank of Japan will intervene, especially if the USD/JPY rises to 160. In a statement, Satsuki Kitayama, the Finance Minister flagged the possibility of taking bold actions to intervene.

Strong US dollar amid inflation concerns 

The USD/JPY exchange rate is rising because of the rising US dollar, with the DXY Index jumping to over $100.

Analysts believe that the Federal Reserve will maintain a highly hawkish tone in the coming months as inflation remains at an elevated level.

A report released on Thursday by OECD showed that US consumer inflation will jump to 4.2% this year from 2.4% in February this year.

As a result, the Federal Reserve may decide to hike interest later this year. The risk, however, is that the US is going through a period of stagflation as the economic growth has slowed. A recent report showed that the economy shed 92,000 jobs in February, and more companies are announcing their job cuts.

USD/JPY technical analysis 

USDJPY chart | Source: TradingView 

The weekly timeframe chart shows that the USD to JPY exchange rate has done well in the past few months and is now hovering near the important resistance level at 160. It has formed an ascending triangle pattern, a common bullish continuation sign in technical analysis.

The pair has remained above all moving averages and the Supertrend indicator. Also, the Relative Strength Index (RSI) has continued rising and is now nearing the overbought level.

Therefore, the pair will likely continue rising as bulls target the key resistance level at 161.84, its highest point on July 1 2024. A move above that level will point to more gains towards the resistance level at 162.