The Japanese yen is back under pressure, with the US dollar trading around the 157–158 yen area, putting the currency pair at the centre of attention as investors weigh a hawkish Federal Reserve against growing concern in Tokyo over excessive yen weakness.

The move comes only days after the Bank of Japan raised its policy rate to 1.25%, its highest level in 31 years. However, the decision failed to give the yen lasting support after two policymakers dissented and the central bank offered limited guidance on the pace of further increases.

Fed outlook keeps dollar supported

The dollar's strength reflects a widening difference in expectations for US and Japanese monetary policy.

The Federal Reserve raised its benchmark interest rate last week to 3.75%-4.00%, its first increase since 2023, and maintained a cautious stance on inflation. Officials have left the possibility of additional tightening open if price pressures remain elevated.

Markets have subsequently increased their focus on the possibility of another Fed hike in October. Reuters reported on Tuesday that futures were pricing roughly a 53% probability of at least a 25-basis-point increase at the October meeting.

That outlook has supported US yields and the dollar, making the yen comparatively less attractive despite the BOJ's recent rate increase.

Why 158 matters for the yen

The dollar reached 158.05 yen on September 18, its highest level in two weeks at the time, before pulling back. By September 22, USD/JPY was around 157.26-157.33.

Japan has already demonstrated that it is willing to act. In late July, the US and Japan carried out a joint intervention to support the yen, an unusually coordinated move that followed months of concern about the currency's decline.

Japanese Finance Minister Satsuki Katayama has subsequently said Tokyo and Washington remain aligned on maintaining orderly currency markets and will continue close communication.

Japan's authorities have also previously stressed that they are prepared to take decisive action against excessive foreign-exchange moves, without identifying a specific exchange-rate level that would trigger intervention.

The BOJ faces a difficult balancing act

The yen's weakness is notable because the BOJ has already moved away from its ultra-loose monetary policy.

Its September rate increase lifted borrowing costs to 1.25%, but the divided vote and cautious guidance prompted investors to question how quickly further hikes could follow. The result was an unusual market reaction: Japan raised rates, yet the yen weakened.

That leaves the currency exposed to movements in US rates. If investors continue to expect higher US rates while Japanese policy normalisation proceeds slowly, the interest-rate gap can continue to favour the dollar.

At the same time, a weaker yen creates problems for Japan because it raises the local cost of imported goods and energy. Reuters has reported that Japanese policymakers are particularly concerned about the impact of yen weakness on domestic prices and household purchasing power.

What markets are watching now

The next moves in USD/JPY are likely to depend on three closely watched factors: US inflation and economic data, signals from the Federal Reserve, and any fresh comments or action from Japanese officials.

The possibility of intervention makes trading around the 158 area particularly sensitive. The July operation showed that official action can produce a rapid reversal in the yen, while the current gap between US and Japanese interest rates continues to provide support for the dollar.

For global currency markets, the question is therefore no longer simply whether USD/JPY can move higher. It is also how far Tokyo is prepared to let the yen weaken before responding.

Disclaimer: This article is for educational and informational purposes only and does not constitute investment, trading or financial advice. Market prices, interest rates and exchange rates can change rapidly.