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Bank of America has released a revised currency outlook, significantly raising its year-end forecast for the Japanese yen against the US dollar. The bank predicts the yen will appreciate by approximately 6% from its current level of around 158, reaching 149 per dollar by the end of the year, supported by coordinated intervention from the US and Japanese governments and expectations of further interest rate hikes from the Bank of Japan. This is an upgrade from the previous forecast of 152.

An analyst team at Bank of America, including Shusuke Yamada, Izumi Devalier, and Tomonori Yamashita, noted that the joint intervention has substantially raised the stakes for Japan's efforts to defend the yen. They argue that to sustain these gains, macroeconomic policy must follow through, specifically by accelerating the pace of rate increases. The team wrote that if the Bank of Japan acts in September rather than waiting until October, it would have an opportunity to demonstrate its commitment to proactively addressing upside inflation risks.

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Looking back, the wide interest rate differential between Japan and the US had previously pushed the yen to a 40-year low of nearly 164. However, after the two countries launched their first joint yen-buying intervention since 1998, the currency quickly rebounded to around 155, marking four consecutive days of gains. While some of those gains have since been given back, both US and Japanese officials have stated they are prepared to act together again if necessary. The Bank of America analysts believe this political signal is significant, stating that in unilateral intervention to support a currency, the size of foreign exchange reserves can be seen as a limit, but with US participation, the ultimate constraint on intervention has effectively been removed.

In a related move, the bank has also slightly raised its forecast for the yen this quarter to 153 from 154. The analysts emphasize that the coordination between the US and Japan reflects a shared objective for the yen's long-term stability. They added that there is now more reason to believe Japan will introduce a broader policy mix, beyond just foreign exchange intervention, to support the yen in the medium to long term.