Following the currency intervention near 163.5, USD/JPY has once again come under the close watch of Japan's financial authorities. Although the Bank of Japan kept its policy rate unchanged at 1%, policymakers signaled that they remain prepared to take further action if the yen continues to weaken.
Fundamentally, the advantage still lies with the U.S. dollar. The interest rate differential between the United States (3.75%) and Japan (1%) continues to support carry trades and sustain demand for the dollar.
However, a new question has emerged. Until now, investors generally expected Japanese intervention only after USD/JPY moved well above 160. But what if Japanese authorities decide to change those expectations by stepping into the market before the pair returns to that level?
That possibility could become one of the biggest sources of volatility for USD/JPY in the weeks ahead.