The yen has shown weakness in the recent foreign exchange market, with the USD/JPY exchange rate touching a two-year low of 161.92 before hovering around 161.45. Market analysis indicates that if the Federal Reserve implements a rate hike plan within this year, the USD/JPY rate could slide further into the 165 range, setting a new record low since 1986. Reversing this downward trend faces significant challenges, as both the Japanese Ministry of Finance and the Bank of Japan have effectively tacitly accepted the exchange rate breaking through the 160 level since early June.

The core reason for the continued pressure on the yen lies in the widening interest rate differential between the US and Japan. Although the Bank of Japan recently raised its policy rate by 25 basis points to 1%, reaching a new high since 1995, Japanese policy rates remain low compared to the Federal Reserve's range of 3.50% to 3.75%. Under the hawkish stance led by the new Federal Reserve Chair, the market is reassessing the rate hike path. Traders generally expect the Fed to raise rates about twice this year, by 25 basis points each time, with the probability of a hike in September around 75%. Several large financial institutions have adjusted their forecasts, believing the likelihood of maintaining unchanged interest rates within the year has decreased.

Capital flow data also confirms the market's bearish sentiment. Latest data shows that speculative net short yen positions have risen to a high since July 2024, reaching over 150,000 contracts. Even though the Japanese government utilized a record 11.7 trillion yen for foreign exchange intervention between late April and early May, the yen's reaction remained limited. There are currently no clear signals regarding whether intervention will occur again. Some viewpoints indicate that the US Treasury Secretary has hinted that the Bank of Japan needs to raise interest rates to curb yen depreciation. Considering that foreign exchange intervention is usually accompanied by the selling of US Treasury bonds, the US side does not wish to impact US Treasury yields.

Regarding the Bank of Japan's future policy path, a former policy board member expects another 25 basis point hike in October or December, but believes that a rate rise to 1.5% next year is the upper limit. In contrast, other market analyses based on the Taylor Rule suggest Japan's neutral interest rate should be close to 3%, with a potential growth rate of 1% and an inflation target of 2%. The continued weakness of the yen indicates that both retail and institutional investors generally believe the Bank of Japan's monetary policy is behind the curve. Although recent declines in oil prices have eased inflationary pressure, the supportive effect on the yen is limited, and the pattern of the widening US-Japan interest rate differential is difficult to fundamentally reverse in the short term.