Japan intervened yen twice in a week. The currency now has every reason to strengthen

• Japanese authorities appear increasingly determined to defend the yen, with repeated market interventions suggesting reduced tolerance for extreme weakness near 160 USD/JPY.

• A weak yen is significantly amplifying imported inflation, particularly through higher energy and food costs, increasing pressure on the BOJ to support the currency.

• We believe June represents a likely window for another BOJ rate hike as inflation remains above target and domestic demand conditions continue improving.

• For investors, unhedged Japan equity exposure such as Eastspring Investments - Japan Dynamic AS SGD could potentially benefit from both Japan’s structural growth story and yen appreciation.

The Japanese yen has remained under heavy pressure in 2026, hovering near historically weak levels around 160 against the US dollar. However, recent market movements suggest that Japanese policymakers are becoming increasingly unwilling to tolerate yen weakness.  

On 30 April, authorities were reportedly estimated to have intervened by purchasing roughly USD35 billion worth of yen over two days, marking one of the largest intervention episodes since 2024. The currency strengthened sharply to 156.6 at the end of the day. Then again on 6 May, the yen suddenly surged from 157.8 to 155.1 against the US dollar within just 30 minutes, reigniting speculation of another round of intervention by Tokyo (Figure 1).

Figure 1: Yen strengthened sharply against USD on 30 April and 6 May

The message from policymakers is becoming increasingly clear: Japan is no longer willing to tolerate excessive yen weakness. In the short term, we believe the Ministry of Finance stands ready to defend the currency and effectively place a floor around the 160 level. Comments by Atsushi Mimura,  Vice Finance Minister for International Affairs, that Japan faces “no constraints” on how frequently it can intervene further reinforce this growing sense of urgency.

While currency intervention can stabilise markets temporarily, we believe the more important story lies in the yen’s improving fundamentals. In our view, the conditions for a stronger yen are steadily falling into place through 2026.

Weak yen is amplifying inflationary pressures

A weaker yen directly raises Japan’s cost of living through imported inflation. As an economy that depends heavily on imported energy and food, yen depreciation makes essential goods significantly more expensive in local currency terms.

According to the Bank of Japan’s (BOJ) Corporate Goods Price Index Report, yen-based import prices rose 7.9% YoY in March. In comparison, import prices measured in contract currencies increased only 2.2%, implying that roughly 5.7% of the increase came purely from yen weakness. In other words, more than half of the inflationary pressure was driven by currency depreciation rather than global commodity prices alone.

Energy costs were a key driver of wholesale inflation. Petroleum products accounted for more than half of March’s 0.8% monthly producer price increase. Chemicals also contributed meaningfully, particularly benzene, xylene, and styrene monomer — critical inputs for Japan’s manufacturing and plastics industries.

At first glance, consumer inflation still appears relatively contained, with March core CPI at 1.8% YoY. However, this was largely due to government electricity and gas subsidies that artificially suppressed prices. Beneath the surface, inflationary pressures remain firm. Transportation inflation, for example, accelerated sharply to 2.1% YoY in March from 0.5% in February, despite the government capping gasoline prices at JPY170 per litre. This reflects the underlying surge in imported fuel costs following the earlier spike in global crude oil prices.

The inflation picture is likely to become even clearer in the coming months as subsidies fade. Major Japanese power companies and gas providers have already announced price increases for April usage. Average household electricity bills are expected to rise by JPY393 to JPY463 from March levels, while gas bills could increase by another JPY148 to JPY195. Importantly, wholesale inflation typically takes several months to fully pass through into consumer prices as companies gradually stop absorbing higher costs and begin transferring them to households. As a result, we believe Japan’s consumer inflation could rise above 2.5% through mid-2026.

This was also reflected in the BOJ’s latest forecasts. During the April policy meeting, the central bank sharply revised its FY2026 inflation projection higher from 1.9% YoY to 2.8% YoY, well above its long-term 2% target. With inflation clearly trending upward and yen weakness amplifying imported cost pressures, the BOJ now has stronger incentives to support a firmer currency as part of its inflation management strategy.

June rate hike is increasingly likely

One of the key reasons behind yen weakness has been the still-wide interest rate gap between Japan and the US. While the US Federal Reserve’s policy rate remains around 3.5%–3.75%, Japan’s benchmark rate is still only 0.75%. Although the gap has narrowed following US rate cuts and gradual BOJ tightening, it remains large enough to sustain carry trades, where investors borrow cheaply in yen and allocate capital into higher-yielding overseas assets. This continues to place downward pressure on yen.

However, we believe the turning point is approaching. June increasingly looks like a realistic window for another BOJ rate hike.

The April policy meeting already revealed growing internal pressure within the central bank to normalise policy further. The unusually divided 6–3 vote saw board members Hajime Takata, Naoki Tamura, and Junko Nakagawa dissent in favour of raising rates to 1.0%. This highlights that support for tighter policy is steadily building within the BOJ.

Beyond inflation concerns, the BOJ also requires evidence of sustainable demand-driven growth before tightening policy further. Recent data suggest those conditions are increasingly being met. Japan’s core-core CPI, which excludes both food and energy, remained firm at 2.4% YoY in March, pointing to resilient underlying inflation, particularly in the services sector. Labour market conditions also remain supportive. The 2026 Shunto wage negotiations delivered a third consecutive year of wage growth around 5%, while real wages stayed positive in both January (+0.7% YoY) and February (+1.9% YoY). Taken together, these data points provide one of the clearest signals yet that domestic demand remains resilient despite ongoing geopolitical uncertainties and the earlier Middle East oil shock.

BOJ Governor Kazuo Ueda has also outlined conditions that would justify delaying further hikes. In our view, a pause would likely require a severe deterioration in economic conditions — something that currently does not appear to be the base case (Table 1). Japan’s economy has so far remained relatively resilient, while geopolitical tensions have recently shown signs of stabilisation through ceasefire discussions and a short memorandum between Iran and US that could potentially end the war.

Table 1: A rate hike would be delayed only in the case of a severe growth deterioration

Scenario	Growth	Inflation	BOJ Response
Base case	Moderate slowdown	Moves in line with forecast	Hike — "if slowdown is not big"
Upside inflation	Limited damage	Overshoots forecast	Hike — explicitly committed
Inflation overshoot	-	Clearly exceeds target	Significant tightening — terminal rate could exceed neutral of 1.0-1.5%
Severe growth shock	Sharp deterioration	-	Hold — hike conditional on growth risks being "limited"

Looking further ahead, we also see the possibility of a second rate hike toward the end of 2026, depending on the inflation trajectory and yen movements. If inflation continues to overshoot the BOJ’s target range and the yen fails to strengthen meaningfully, the central bank may accelerate the pace of tightening.

Overall, we believe Japan’s policy normalisation path is becoming increasingly clear, and this should become one of the most important structural supports for yen appreciation in the second half of 2026.

Position for yen appreciation with unhedged Japan equity funds exposure

Japan’s long-term growth story remains firmly intact. Monetary policy normalisation is progressing steadily, while corporate governance reform still appears to be in its relatively early stages, leaving substantial room for further equity market re-rating. At the same time, Japan continues to benefit from powerful structural growth themes tied to semiconductors, defence, advanced manufacturing, and supply chain diversification under the pro-growth “Takaichi trade” narrative.

For investors seeking exposure to Japan through our recommended funds, we continue to favour the unhedged share class, particularly the Eastspring Investments - Japan Dynamic AS SGD. An unhedged strategy allows investors to potentially benefit from both Japanese equity market gains and yen appreciation against the Singapore dollar.

The downside risk for the yen now appears increasingly limited given policymakers’ willingness to defend the currency and prevent excessive weakness. At the same time, the upside potential for the yen is improving as inflation pressures rise, carry trades gradually unwind, and higher Japanese interest rates attract capital back into domestic assets. If inflation risks continue tilting upward and the BOJ delivers two rate hikes in the second half of 2026, the combination of equity growth and currency appreciation could become a particularly powerful driver of returns for Singapore-based investors.

More importantly, this is unlikely to be merely a short-term story. Japan’s broader economic transformation and policy normalisation cycle are multi-year developments. Even beyond 2026, we continue to see the potential for gradual yen strength to enhance overall investment returns over the longer term.

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.