USD/JPY 160 is the Big Deal for 2026Even with the US Dollar showing considerable weakness in DXY and against many major currencies like the Euro or British Pound, USD/JPY is roughly flat on the year.
After coming into 2025 riding a wave of strength a dramatic sell-off developed in the first quarter of the year, with the pair plunging down for another test of the 140.00 handle. But, like the two tests before that, sellers suddenly shied away, and prices began to push-higher although it wasn't until later in the year that buyers were able to push a bullish trend.
And then, in H2 of 2025, even as USD held near lows, USD/JPY rallied and another shot of life showed up in October on the heels of Japanese elections. The pair even rallied through the December rate hike, and this sets the stage for an interesting tangle as we go into 2026.
The recently elected Japanese government was very much supported by a pro-growth economic policy that seems to run counter to rate hikes and policy tightening, but one look at Japanese government bonds highlights that we may soon be nearing a point where the BoJ has to decide whether to defend Japanese bond rates or defend the Yen. Hiking rates more aggressively could possibly slow the run in yields, but then threatens a JPY reversal, which could have some pretty considerable collateral damage. Or, taking a looser approach to policy could allow the Yen to continue to sell-off, and USD/JPY to continue to break out, which can also drive Japanese borrowing costs higher.
There's also the Finance Ministry to consider, as it's their task to monitor the currency and as we've seen multiple times in the now almost five years of USD/JPY strength, they can and will order the Bank of Japan to intervene to stem the bleeding in JPY. This doesn't necessarily 'work,' however, as we can see from the example in April of 2024, when the BoJ intervened following a test of the 160.00 handle, only for buyers to bid the pullback and drive the pair right back above the big figure just weeks later.
The example a few months later, in July, shows what the consequence can be, as another intervention hit on the morning of a below-expected CPI print, and that sent the pair spiraling lower, along with many other global risk markets. It didn't take long for the headlines to make the connection, alleging the sell-off in US equities as a repurcussion of the unwinding Japanese Yen carry trade. This helped to produce the third-highest spike in the VIX index - ever - on the morning of August 5th, 2024.
So there's not really an easy path forward here for the BoJ, or for Japanese markets in 2026. But, for now, the look is at what happens after that next test of 160.00, and whether the MoF orders the BoJ to fire a shot across the bow to try to shake speculators out of long USD/JPY positions. - js
