Yen Bearishness Persists on Fiscal Risks, Though Coordinated Intervention Looms, BofA Says

Bearish sentiment toward the Japanese yen remains deeply entrenched among investors, driven by concerns over Japan's fiscal risks, the perception that the Bank of Japan is behind the inflation curve, and persistent structural selling pressure, according to a recent analysis by BofA Global Research.

Drivers of Yen Weakness

Analysts at BofA noted that market participants have largely viewed Japan's currency interventions as temporary measures, constrained by the country's finite foreign-exchange reserves, which stood at approximately $1.3 trillion at the end of June. The report also identified currency hedging by overseas investors in a rising Japanese equity market as a significant source of yen weakness.

While these bearish factors dominate, the bank acknowledged that some structural selling pressure has been increasingly offset since the second half of 2025. This has been attributed to a rise in foreign investment into Japan and growing export demand related to artificial intelligence.

Coordinated Intervention Shifts Calculus

The dynamic may be changing following a coordinated intervention by Japan and the United States. The joint operation on July 30 demonstrated a strong commitment to supporting the currency, and the U.S. participation has challenged the market's view of a limited capacity for intervention.

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U.S. Treasury Secretary Scott Bessent reinforced this stance, stating that Washington would “not hesitate to participate in further joint intervention.” This raises the prospect of more aggressive, coordinated action to defend the yen, potentially altering trader behavior.

Key USD/JPY Levels to Watch

According to BofA, specific exchange rate levels are now critical for market psychology. A decisive move in the USD/JPY pair could trigger significant shifts in positioning.

• The 155 level is viewed as a critical floor. Previous interventions near this point encouraged investors to buy dollars on dips. A sustained break below 155 could absorb underlying dollar demand and shift the market toward selling on rallies.
• A return above 160 could weaken confidence in the authorities' ability to manage the currency.
• A drop below 150 may accelerate hedging-related dollar sales by Japanese corporations.

Despite the prevailing bearishness, BofA analysts maintained their constructive outlook on the yen, reiterating a year-end USD/JPY forecast of 152. This view is based on Japan’s improving balance of payments and the prospect of faster interest-rate increases by the Bank of Japan.