MARKET NEWS

Investing.com -- The Japanese yen's sharp rebound may prove short-lived, but signs that the Bank of Japan is becoming more proactive on monetary policy could provide a firmer foundation for the currency than government intervention, Capital Economics said.

The yen has strengthened about 3% against the U.S. dollar over two days, coming just over a month after Japanese authorities intervened heavily to support the currency.

That raised questions over whether the Ministry of Finance had returned to the market. There is little evidence of fresh intervention so far, with the price action appearing more consistent with a possible "rate check," which can precede direct yen purchases.

The currency's gains have lacked the large, abrupt moves associated with previous interventions, and there have been no official or media indications that authorities are actively buying yen.

Instead, expectations for tighter BoJ policy appear to be playing a bigger role.

Recent hawkish signals from policymakers have strengthened expectations for a rate increase at the September meeting. Money markets now price a greater than 50% chance that the central bank will deliver two 25-basis-point hikes by year-end.

Reports that Japan's Government Pension Investment Fund could rebalance its portfolio toward domestic assets may also support the currency.

The bigger question is whether those forces can produce a lasting recovery. Currency intervention has repeatedly provided only temporary support in recent years since it does not change the underlying forces driving exchange rates. Tighter BoJ policy, potentially combined with GPIF portfolio changes, could provide stronger support.

Still, BoJ decisions have repeatedly fallen short of hawkish market expectations, and concerns surrounding Japan's fiscal outlook continue to weigh on the yen.

USD/JPY is forecast at 160 by the end of 2026, compared with around 156 when the report was published. The yen also remains significantly undervalued, leaving scope for a larger recovery once conditions turn more decisively in its favor, though that is seen as more likely to become a 2027 story than an imminent shift.