There seems to be no way of stopping the USD/JPY rally. Speculation of snap elections is mounting, and the return of some degree of political risk premium is offering another chance to test Japan’s tolerance band on its currency. Ongoing Japan-China diplomatic tensions are also adding fuel to the fire, ING's FX analyst Francesco Pesole notes.

Intervention alone unlikely to reverse USD/JPY trend

"On Monday, we thought upside risks extended to 160, and while the rally may slow close to that mark on intervention fears, it’s looking increasingly likely that level will be ultimately tested. After all, in July 2024, Japan let the pair rise above 160 and only intervened when it nearly touched 162. It’s hard to pick the right level for intervention, but if the BoJ hasn’t moved so far, it’s reasonable to expect it’ll just wait for a 160+ print."

"For reference, the 11 July 2024 USD/JPY move on the first intervention was -1.8%. Interestingly, back then, CFTC net non-commercial positions on the yen were -52% of open interest, and they are now instead 3% in net-long territory, even if spot action argues otherwise. What matters the most is whether FX interventions can drive a sustainable USD/JPY recovery."

"As a rule of thumb, they don’t on their own. In 2024, they effectively curbed upside pressure in the short term, but the follow-up drop in USD/JPY was entirely a function of US 2-year swap rates collapsing by some 50bp in the following month. That doesn’t seem like a plausible scenario at this stage, and the risk of snap elections keeps markets reluctant to price in any BoJ hike before this summer."