USD/JPY started the week firmer, rebounding towards 159.50 in Asia and moving back within reach of the four-week high set last Thursday. Japan’s first-quarter corporate capital spending was flat, undershooting forecasts and slowing sharply from a 6.5% year-on-year rise in the final quarter of 2025. The softer domestic data, alongside concern linked to the Middle East conflict and ongoing energy supply disruption through the Strait of Hormuz, weighed on the yen, while demand for the US dollar also improved. Geopolitical risk and expectations for a hawkish Federal Reserve stance lifted the USD Index (DXY), which extended its recovery from a two-week low hit on Friday. The Israel Defense Forces expanded ground operations in Lebanon, and Benjamin Netanyahu said he had ordered troops to push further into the fight against Hezbollah, while the US-Iran standoff persisted. Iranian officials said no deal has been finalised and proposals are still being channelled via Pakistani and other regional mediators, with disputes centred on Iran’s nuclear programme and the Strait of Hormuz; a modest crude oil rebound from Friday’s over one-month low added to inflation concerns. Talk of potential Japanese intervention could restrain further yen selling, as attention turns to US data, beginning with the ISM Manufacturing PMI later today.

USD/JPY Bullish Drivers and Macroeconomic Backdrop

Given the current landscape on June 1, 2026, we see a clear opportunity for USD/JPY to trend higher in the coming weeks. The combination of a weak Japanese yen and a resilient US dollar creates a favorable backdrop for bullish strategies. This view is supported by poor economic data out of Japan and persistent geopolitical tensions that favor the dollar. Japan’s economy is showing signs of slowing, as confirmed by the latest corporate capital spending figures from the Ministry of Finance, which flatlined in the first quarter of 2026. This is a significant drop from the 6.5% growth seen in the prior quarter and signals weakening domestic investment. Continued energy supply concerns through the Strait of Hormuz, where roughly 20% of global oil consumption passes, further pressure the energy-import-dependent Japanese economy. The main driver for a higher USD/JPY remains the wide interest rate difference between the US and Japan. We see US 10-year Treasury yields holding firm around 4.5%, while Japanese government bonds are yielding less than 1.0%, creating a substantial incentive for traders to favor the dollar. This gap is unlikely to narrow soon, as rising oil prices, with Brent crude back above $85 a barrel, feed into US inflation concerns and support the Federal Reserve’s hawkish stance. Geopolitical risks are also benefiting the US dollar’s status as a safe-haven currency. The escalating conflict in Lebanon and the unresolved standoff with Iran are keeping markets on edge. This uncertainty reinforces demand for the dollar, adding another layer of support to the USD/JPY exchange rate.

Risks of Intervention and Recommended Strategy

However, we must remain cautious as the pair approaches the 160.00 level. Japanese authorities have a history of intervening to support their currency, as seen in both 2022 and more recently in the spring of 2024 when the rate crossed above 155. The threat of official selling by the Ministry of Finance could trigger a sharp, sudden reversal and cap gains. Considering these factors, we believe buying USD/JPY call options is the most prudent strategy. This allows us to profit from a potential move higher towards the 160-162 range while strictly limiting our downside risk. A call option strategy protects us from significant losses should Japanese authorities decide to intervene unexpectedly.

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