Top analysts predict: the Japanese yen may fall to 170 against the US dollar next year. Japan's ability to intervene in the foreign exchange market has weakened significantly.

According to the latest accuracy ranking of forecasts, Kshitij Consultancy Services, ranked first in USD/JPY forecasts, founder and chief forex strategist Vikram Muraka predicts that the yen may depreciate to 170 yen per US dollar next year. The analyst ignores news events in his forecasting model and relies mainly on technical analysis. Muraka stated that one of his advantages is focusing on market signals rather than every news release from the Japanese Ministry of Finance or the Prime Minister's Office. His desk is covered with various charts tracking variables such as the ratio of the Nikkei 225 Index to the Dow Jones Industrial Average, short-term interest rate differentials, and the strength of the RMB to JPY exchange rate. Muraka said, "We don't pay too much attention to news." He also ranks second in forecasting the EUR/USD exchange rate using a similar method, saying, "Regardless of what factors we track, they should ultimately be reflected in price charts." Having been involved in forex trading and exchange rate forecasting since 1991, Muraka stated that in recent years, the ratio between the Nikkei 225 Index and the Dow Jones Industrial Average has shown the strongest correlation with the yen's movement. He admitted that he is not entirely sure why this relationship exists, but it has proven to be a reliable indicator for predicting the yen's movement. He said, "Since 2024, the movement of USD/JPY, explained by the ratio of the Nikkei Index to the Dow Jones Index, has been more effective than explaining it using the US-Japan yield spread. I think this is a relationship that the market pays less attention to." Despite the Japanese government's record-breaking intervention in the currency market from April 28 to May 27, injecting 11.73 trillion yen (about $723 billion) to support the yen, the yen's weakness continues. Currently, the USD/JPY exchange rate is hovering around 162.84 yen per US dollar, the lowest level in nearly 40 years. The significant interest rate differential between the US and Japan, as well as the massive fiscal stimulus plan introduced by Japanese Prime Minister Kato Sanae, continue to pressure the yen. The Bank of Japan raised interest rates last month, but overnight index swap (OIS) markets indicate that traders expect only one more rate hike of 25 basis points this year, suggesting that Japan's disadvantage in low interest rates compared to other major economies will likely persist. In addition, Kato Sanae's inclination to maintain an accommodative monetary policy stance is also seen as a potential obstacle to further rate hikes by the Bank of Japan. Muraka said, "The basic scenario is still for the yen to continue weakening." He concluded, "Among all major central banks in the world, I believe the Bank of Japan will be the last one to take aggressive rate hike actions." Muraka also believes that carry trades will continue to weigh on the yen. Carry trades refer to investors borrowing low-interest yen to invest in assets outside Japan with higher returns. Even in his most optimistic scenario for the yen, it can only appreciate to around 154 yen per US dollar in the short term. He said, "170 is a reasonable target for the next year; if this level is surpassed, higher targets will also come into view." He added that the ability of the Japanese Ministry of Finance to "change the direction of the market has significantly weakened." Meanwhile, the market is cautious about potential intervention actions by Japanese authorities. Japanese Finance Minister Katakami Soka reiterated that she and other officials could take appropriate actions in the foreign exchange market at any time. Japan's top foreign exchange official, Sanmura Jun, did not reiterate the finance ministry's usual exchange rate stance this month, including expressions like "ready to take decisive action" (implying intervention in the currency market). Katakami Soka recently urged large pension funds, including the Government Pension Investment Fund (GPIF), to increase their investments in domestic assets in Japan. While her remarks briefly boosted the yen, investors generally doubt that the yen can sustain a rebound without changes in fiscal and monetary policy. It is worth noting that as the yen continues to weaken, combined with the relatively restrained response from the Japanese government, some market participants speculate that there is still room for further decline in this round. Jasper Cole, executive director of financial services group Monex Group, and Calvin Yang, portfolio manager at asset management company Blue Edge Advisors, both believe that if the Bank of Japan falls behind the situation and fails to tighten monetary policy in a timely manner, the yen's exchange rate could fall to 200 yen per US dollar or even lower. This once unimaginable level has now become a medium-term risk, although it remains an extreme scenario. In addition, T. Rowe Price, with assets under management of $1.89 trillion, believes that 169 yen per US dollar may be the worst-case scenario. Mizuho Bank has set the bottom line at 170 yen per US dollar. Japan's second-largest bank, Mitsubishi UFJ Financial Group, outlines a possible scenario in the coming years where the yen falls to 180 yen per US dollar. Traders believe that repeated warnings from the Japanese government to take decisive action to curb the yen's depreciation are also unlikely to provide lasting relief in the long run. Many investors believe that even if Japanese authorities intervene in the currency market to support the yen, it will only temporarily slow the decline, as the market generally judges that Japan's slow response to curbing inflation through rate hikes is a structural factor contributing to the yen's long-term weakness. Currency intervention is like adding boiling water to a pot Since May, the yen has been steadily depreciating against the US dollar, with the Japanese authorities intervening in the currency market just one month before. From April 28 to May 27 this year, after the yen first broke below 160 yen per US dollar, the Japanese government intervened in the currency market with a record-breaking 11.73 trillion yen. However, like the intervention actions in 2022 and 2024, these measures only temporarily eased the decline, and the yen subsequently returned to its long-term depreciation trend. Analysis indicates that this phenomenon reflects the market's gradual desensitization to traditional intervention measures, as long as the interest rate differential between the US and Japan is not fundamentally resolved, intervention can only be seen as a temporary remedial measure. This has led some investors to further increase their short positions on the yen, knowing that the Japanese authorities could use up to $1.09 trillion in foreign exchange reserves to intervene in the market and support the continued pressure on the yen. Why is intervention difficult to reverse the yen's decline? Fundamentally, the forces driving the yen's depreciation are not from "raids by speculators," but from the continued resonance of three deep structural factors. First, the unbridgeable gap in the US-Japan interest rate differential. Since the outbreak of the Middle East conflict, the market's expectations of the US Federal Reserve's interest rates have undergone a dramatic reversal - at the beginning of the year, the market was generally expecting rate cuts, but now traders have begun to price in the possibility of rate hikes by the end of 2026. In contrast, while the Bank of Japan is also slowly normalizing its monetary policy, the interest rate differential between the US and Japan remains at historically wide levels, which is the core macro factor putting pressure on the yen. Second, the energy shock has exposed Japan's structural vulnerability. As one of the world's largest energy-importing countries, Japan has a high dependency on Middle Eastern crude oil. After the US-Iran conflict disrupted transportation in the Strait of Hormuz, oil prices soared, combined with the yen's depreciation, creating "double-input inflation" pressure. This "cost-driven inflation" not only fails to boost consumption but also erodes business profits and residents' purchasing power. Third, the Bank of Japan's "lagging behind" is consuming market patience. With inflation exceeding the 2% target for several consecutive months, the Bank of Japan's rate hike pace is generally considered "too cautious" by the market. Additionally, the most hidden but crucial constraint on rate hikes in Japan comes from the political aspects. Kato Sanae continues the policy preferences of "Abenomics," vigorously advocating for maintaining an accommodative fiscal and monetary policy environment, believing that low-interest rates and accommodative conditions are the only cure for the Japanese economy and strongly opposing rate hikes. Therefore, the intervention measures by Japanese authorities can only influence the pace of the yen's depreciation against the US dollar but cannot change the trend of depreciation. Only when the expectations of rate hikes by major central banks such as the Federal Reserve and the European Central Bank completely recede or turn downward, coupled with the Bank of Japan accelerating rate hikes and ending bond purchases, can the Japanese government's intervention in the yen exchange rate achieve the expected results.