U.S. Treasury Secretary Janet Yellen's remarks are eroding the yen's last "psychological line of defense."

According to market analysis, Nomura noted in its latest FX strategy report that by publicly denying any U.S. involvement in foreign exchange intervention, Yellen has effectively removed the "anchor of intervention expectations" that previously weighed on USD/JPY. This has made the market less cautious when shorting the yen.

Market reaction indicates this was more than a symbolic gesture. Shortly after Yellen's unequivocal "Absolutely not" on CNBC on January 28, USD/JPY rebounded sharply, climbing from around 152.7 to the 153.8 level, nearly erasing the losses triggered by earlier rumors of a "New York Fed rate check."

What was truly breached was not a specific price level, but the "expectation of intervention." The previous week's rapid retreat in USD/JPY from near 160 was largely not due to a reversal in fundamentals, but rather heightened market vigilance over two key concerns:

Whether the U.S. had already conducted "rate checks" via the New York Fed, paving the way for coordinated intervention.

Whether Japan's Ministry of Finance (MOF) had already quietly entered the market to buy yen.

However, Nomura emphasizes that Yellen's statement substantially weakens the first hypothesis. Even if the New York Fed did conduct rate checks, it would be a procedural step, not equivalent to ongoing or imminent intervention.

The result: The "policy risk premium" embedded in USD/JPY has been rapidly compressed, making shorting the yen once again a trade with a more favorable risk-reward profile. The other line of defense comes from Japan itself. Nomura's estimates, based on the Bank of Japan's daily fund account data, reveal that during the sessions of significant USD/JPY decline, there was no clear, sustained buying pressure on the yen, insufficient to support the judgment of "substantive intervention."

What does this imply? If the U.S. stance leans towards "not excessively monitoring," and Japan has not yet truly intervened, hedge funds and macro traders naturally conclude that the policy resistance to selling yen is diminishing at this stage. The focus is shifting: from "who will intervene" to "can Japan's fundamentals hold up?" Nomura believes that as uncertainty around FX intervention recedes, the market's trading logic is pivoting—USD/JPY will revert to being priced based on "Japan's own fundamentals." Three key themes are particularly crucial:

1. Fiscal Policy: Where will the money for the Takaichi government's "tax cut pledge" come from? Japan's House of Representatives election is scheduled for February 8th. Nikkei surveys suggest the LDP may lead significantly, reinforcing the "Takaichi trade." However, the source of funding for the consumption tax cut remains unclear.

Nomura points out that if expectations for fiscal expansion persist without a clear financing plan, it could exert downward pressure on the yen in the medium term while simultaneously pushing up Japanese interest rate expectations. During the election period, any statements regarding funding sources will directly impact the exchange rate.

2. Inflation Expectations: The yen is being held back by "domestic inflation logic." An easily overlooked change is that Japan's market-implied inflation expectations have risen significantly since the LDP leadership election in October 2025.

Nomura observes a notably stronger correlation between USD/JPY and Japan's 10-year Breakeven Inflation (BEI)—rising inflation expectations are actually constraining the yen's rebound potential. This explains a "counter-intuitive phenomenon": even without further widening US-Japan interest rate differentials, the yen remains weak.

3. Monetary Policy: The exchange rate itself is pressuring the Bank of Japan. In the short term, Yellen's remarks might dampen market bets on the BOJ "hiking rates immediately." But Nomura also highlights a more critical medium-term logic: if USD/JPY approaches the upper 150s again, the BOJ will find it harder to maintain patience.

In other words, the weakening exchange rate itself has become a key variable in the BOJ's reaction function. Should the yen depreciate too rapidly, expectations for a rate hike in April or beyond are unlikely to fully dissipate; instead, there's a risk that market pricing for Japan's terminal rate could be pushed higher. This also implies that 160 is not a level that can be "easily breached." The yen's "defensive battle" is entering a new phase. Nomura's core assessment can be summarized in three points:

Yellen's "non-intervention" stance weakens the yen's short-term defense mechanism. In the absence of clear intervention evidence, the market is more willing to test the upside for USD/JPY. However, medium-term pricing will increasingly depend on Japan itself: fiscal policy, inflation, and the central bank's response.

In the short term, the yen is indeed more vulnerable; but in the medium term, excessively rapid depreciation could trigger policy responses from within Japan. This博弈 is shifting from reliance on "external intervention" to being governed by "internal constraints."