What happens if USD/JPY goes above 160? ‘Credibility falls further’

If the USD/JPY exchange rate climbs above 160 without any intervention, it could erode trust in Japan's dedication to supporting the yen, potentially driving the currency towards 165, according to BofA Securities. As the pair is currently hovering near 160, markets are closely watching to see if Japanese and US authorities will step in to prevent further depreciation of the yen.

BofA warns that a break above 160 without any follow-up action would signal limited policy resolve, leading to a potential rise in USD/JPY to 165 in August. The Bank of Japan's longer-term bond yields are expected to steepen as the yield curve widens, with longer-term yields increasing faster than shorter-term rates. Following the coordinated intervention between Japan and the US on July 31, confidence in the authorities' commitment to the yen had improved.

However, this credibility has been undermined since officials declined to intervene again after weaker-than-expected US employment data pushed the USD/JPY rate lower on August 7. If the pair rebounds and finds support at the 159 level, a more robust policy response might help restore confidence. Conversely, intervention that sends USD/JPY materially lower after strong US inflation data could indicate that authorities are waiting for the risk to pass before acting.

Alternatively, a response after a weaker CPI reading pushes the pair lower could reinforce the move, signaling an intention to strengthen the yen beyond a temporary correction. If officials manage to prevent USD/JPY from breaking 160 but fail to move it closer to 155, markets may interpret this as a signal that they are content with the pair trading within a 155-to-160 range.

Continual intervention to defend the 160 level could prove costly, potentially prompting the Bank of Japan to accelerate interest-rate hikes. This shift would transfer the primary responsibility for supporting the yen from currency intervention to monetary policy. BofA cautions that accurately predicting the timing or trigger for intervention remains challenging, as authorities have little incentive to establish a predictable reaction function.