The Japanese yen has staged a strong comeback in the past few days as investors focused on its potential intervention and the latest actions by the Federal Reserve. The USD/JPY pair was trading at 153, down by 4% from its highest level this year.

Concerns about Japanese yen intervention remain

The USD/JPY exchange rate has been in focus in the past few weeks as concerns about the Japanese economy continued. It crashed last week after media reports suggested that Donald Trump’s administration was willing to help Japan intervene.

The pair then rose slightly this week after Scott Bessent announced that the US will not intervene. This is notable as Bessent is a well-known figure in the forex industry because of his role in collapsing the British pound in the early 1990s.

Market participants are concerned on whether Japan will succeed in going solo in intervening in the forex market. In a note, an analyst from CBA said:

“Without US involvement, any intervention by the Ministry of Finance  alone would be far less effective in countering downward pressure on the yen, meaning any post-intervention gains are likely to fade quickly.”

Why the Japanese yen needs intervention 

The Japanese yen has been in a freefall in the past few months, with the USD/JPY exchange rate soaring from a low of 139 in April last year to a high of 160 this year.

This performance accelerated after Sanae Takaichi became the prime minister and embraced Shinzo Abe-like policies. Her initial policy was a large stimulus program that she aimed at solving the inflation situation. She now plans more stimulus, including tax cuts if she wins the election in February.

Takaichi also took a more hawkish stance on China, a top trading partner. She vowed that her government would step in to help Taiwan if Beijing attacked, a move that infuriated Beijing.

The Japanese yen has crashed despite the ongoing divergence between the Federal Reserve and the Bank of Japan (BoJ). The BoJ has embraced a more hawkish tone and hiked interest rates to the highest level in three decades. It has hinted its willingness to continue hiking rates this year.

The Federal Reserve, on the other hand, left interest rates unchanged on Wednesday, and analysts believe that its next move will be lower. Besides, Donald Trump will soon announce the potential Jerome Powell replacement. He has maintained that the potential replacement will be one who will be willing to cut rates aggressively.

USD/JPY technical analysis

USD/JPY chart | Source: TradingView 

The daily timeframe chart shows that the USD/JPY exchange rate has suffered a harsh reversal in the past few days, moving from a high of 159.40 to 153 today. It remains below the crucial support level at 154.3, its lowest level in December last year.

The pair has crashed below the 23.6% Fibonacci Retracement level. It also moved below the 50-day and 100-day Exponential Moving Averages, and is now in the process of forming a bearish flag or pennant pattern.

Therefore, the most likely scenario is where it continues falling, potentially to the 50% retracement level at 150.

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