Is the latest rebound in the Japanese yen real?

In a recent development, the Japanese yen experienced a significant surge against the US dollar over the course of just two days, marking a 3% strengthening. This surge occurred shortly after the Bank of Japan (BoJ) made heavy interventions to support the currency, reigniting concerns about the Ministry of Finance's involvement in the market.

However, early signs suggest that this rebound may not be sustained by fresh government intervention, as there's no clear evidence of such actions. Instead, analysts believe that expectations for tighter monetary policy from the BoJ might be the driving force behind the currency's gains. Recent hawkish signals from policymakers have increased the likelihood of a rate hike at the September meeting, with money markets now pricing a greater than 50% chance of two 25-basis-point rate hikes by year-end.

Additionally, reports suggest that Japan's Government Pension Investment Fund may be shifting its portfolio toward domestic assets, which could further bolster the yen. While currency intervention has historically offered only temporary support, policymakers' tighter stance combined with potential portfolio changes from the GPIF might provide more robust backing for the currency.

Nonetheless, the BoJ's past decisions have often fallen short of market expectations, and Japan's fiscal outlook remains a significant concern for the yen's value. Currently, analysts forecast USD/JPY to reach 160 by the end of 2026, a figure higher than the 156 projected when the report was published. Despite the yen's current undervaluation, offering room for a more substantial recovery once conditions become more favorable, this improvement is more likely to materialize in 2027 rather than in the near future.