USDJPY

31 July 2026, 09:45 UTC Chief Investment Office GWM Investment Research

USDJPY: FX intervention buys time, while the Fed reaches a crossroads CIO View: USDJPY Teck Leng Tan, CFA, Strategist, UBS AG Singapore Branch Dominic Schnider, CFA, CAIA, Strategist, UBS Switzerland AG

• The Japanese finance ministry's intervention has capped near-term CIO Forecast- USDJPY Negative long term trend upside risks for USDJPY, but has not changed the underlying drivers of yen weakness. The lack of a final warning before the intervention 31 Jul 26 160.00 PPP*: 90.0 makes future action less predictable and potentially more effective at Sep 26 162.00 TEEER*: 84.0 deterring speculative positioning. Dec 26 160.00

• Japan's policy mix remains unlikely to generate sustained yen Mar 27 158.00 strength. With the BoJ expected to continue gradual policy Jun 27 158.00 normalization and real rates remaining negative, the yen should Refinitiv, Macrobond, UBS calculation. *Purchasing Power continue to be supported more by intervention risk than by domestic Parity (PPP) is not a forecast per se, but a long-term monetary fundamentals. equilibrium value for an exchange rate, calculated by • The US side remains the key swing factor for USDJPY. We revise our UBS, TEEER refers to the 'trend-extrapolated equilibrium forecasts higher to 162, 160, 158, and 158 for September 2026, exchange rate', which is a three-year PPP projection. December 2026, March 2027, and June 2027, respectively (from 158, 156, 154, and 152 previously), with the outlook hinging on incoming US data and whether the Federal Reserve can maintain MoF's FX intervention likely triggered policy credibility heading into September. liquidation of stretched short-JPY positioning Speculative JPY futures contracts

It has been a volatile week for USDJPY, marked by three major events: the FOMC meeting on Wednesday, reported Japanese Ministry of Finance (MoF) FX intervention on Thursday, and the Bank of Japan (BoJ) policy meeting on Friday.

USDJPY initially declined following the FOMC meeting, as markets interpreted the Federal Reserve's communication as indicating limited urgency to raise rates, weighing on the US dollar. A day later, the MoF reportedly intervened in the FX market, triggering a sharp drop in USDJPY from around 163.6 to 158 before the pair stabilized slightly above 160. On Friday, the BoJ's decision to leave policy rates unchanged Source: Bloomberg, UBS, as of July 2026 provided little support for the yen. However, market participants refrained from aggressively re-establishing short yen positions, given concerns that Japanese authorities could conduct a second round of intervention if depreciation pressures re-emerge.

What does this mean for the USDJPY outlook? First, the MoF intervention has temporarily capped upside risks for USDJPY. It also signals a potentially more effective intervention strategy. Unlike previous episodes, the MoF did not issue a clear "final warning" before entering the market. This increases uncertainty around the timing of future interventions, potentially enhancing their deterrent effect against speculative positioning.

This report has been prepared by UBS AG Singapore Branch, UBS Switzerland AG. Please see important disclaimers and disclosures that begin on page 4.

Second, despite the latest intervention, the yen remains vulnerable to Markets could trim its stretched net- renewed weakness as long as markets perceive the BoJ to be behind the long USD positioning if the Fed is seen curve. Japanese policymakers continue to show a stronger preference for as falling behind the curve addressing yen weakness through MoF intervention rather than through a Speculative USD net positioning faster normalization of monetary policy. Under our base case, the BoJ will maintain its gradualist approach, taking another 6-12 months to reach its terminal policy rate of around 1.5% from the current 1.0%. As a result, real interest rates in Japan are likely to remain negative, preserving the yen's role as a preferred funding currency for both domestic and international investors.

Viewed purely through the Japan lens, we do not see domestic factors generating sustained broad-based yen…