In the early hours of the American session on Thursday, USD/JPY was trading around 163.80–163.90, remaining near multi-year highs after a short-term consolidation. The key driver for the pair's growth has been the renewed jump in global oil and natural gas prices, which has taken a heavy toll on the Japanese economy, a net importer of energy resources. The escalation of the conflict between the US and Iran (now the 12th night of strikes in a row) and threats from the Houthis in the Red Sea have pushed WTI above $90 per barrel, heightening inflation concerns and supporting the dollar.

Verbal interventions from Finance Minister Shunichi Suzuki, who reiterated a readiness to take "decisive action" if necessary, have had minimal effect on the market. Markets assess the likelihood of immediate currency intervention as low, given that historical experience shows it is limited in changing the fundamental trend.

Fundamental Background: Carry Trade and Central Bank Expectations

The Interest Rate Differential Remains the Dominant Factor

The wide gap between the Fed's interest rates (3.50–3.75%) and the Bank of Japan's (1.00%) continues to stimulate carry trade operations, where investors borrow yen to purchase higher-yielding assets in other currencies. Despite reports that BoJ officials are open to raising rates more rapidly than the consensus expects, economists warn that internal rate increases alone may not be enough to reverse the weakening trend.

Expectations of a Rate Hike by the BoJ Persist

According to a Reuters survey, 86% of economists predict that the BoJ will raise rates by 25 basis points to 1.25% by the end of the year, with 35% expecting this move as early as October. However, even a rate hike in September is expected to be more of a supporting measure than a complete trend reversal, economists say.

Long-Term Outlook on Yen Recovery

Commerzbank maintains a constructive forecast for several quarters ahead, expecting that a shift in sentiment and subsequent easing of US monetary policy will bring USD/JPY to the 145.00 level in the medium term. However, as long as global energy prices remain high and yields outside Japan are elevated, USD/JPY will likely stay near its highs from the beginning of the year.

Key Events to Watch

Conclusion and Recommendations for Investors

The USD/JPY pair is in a decisive phase, where the bullish momentum from the interest rate differential and geopolitical uncertainty faces risks of currency intervention and possible changes in Fed rhetoric. The key level of 163.00 remains the main dividing line for short-term dynamics. Next week, market attention will be focused on the FOMC and BoJ meetings, as well as developments in the geopolitical situation, which may provide new signals for further movement.

For Short-term Traders: Prioritize long positions upon a breakout of 164.00 with targets at 164.50–165.00. Consider short positions only if there is a breakout below 162.63 (200 EMA on the 1-hour chart) confirmed by fundamental factors.

For Medium-term Investors: Take a wait-and-see approach until the geopolitical situation clarifies and results from the central bank meetings are available. A correction to 161.68 (200 EMA on the 4-hour chart)–161.20 (50 EMA on the daily chart) can be used to enter long positions if the wide interest rate differential is maintained.

Risk Management: Stay cautious due to high volatility related to geopolitical events and possible currency intervention. Strictly adhere to stop-loss orders and monitor developments in the Middle East, as well as comments from representatives of the Fed and the BoJ.