U.S. investment bank Citi expects that Japanese authorities may step into the foreign exchange market when the USD/JPY exchange rate rises to around 160, with the goal of pushing USD/JPY below 155.

In a research report released on Thursday, Citi noted that potential currency intervention and rising interest rates are beginning to provide support for the yen to appreciate.

Against this backdrop, Citi believes there is limited room for further gains in EUR/JPY, projecting the pair could fall to around 170 next year; if turbulence in European financial markets intensifies, this move could occur earlier.

Expectations Mount for Japan's FX Intervention, USD/JPY at 160 May Be Key Level

Citi believes Japanese authorities may take foreign exchange intervention measures when USD/JPY rises to around 160, in order to curb further depreciation of the yen and attempt to push USD/JPY back below 155.

At the same time, rising interest rates are also beginning to provide support for the yen exchange rate.

Citi expects that the combination of currency intervention and interest rate factors will exert certain upward pressure on the yen.

However, yen movements remain influenced by global risk appetite.

Citi warns that if Japanese and U.S. stock markets rebound further and investor risk appetite recovers, this could re-intensify downward pressure on the yen.

Limited Upside for EUR/JPY, Could Fall Back to 170 Next Year

With the yen receiving policy support, Citi holds a cautious view on the subsequent trajectory of EUR/JPY.

The bank expects EUR/JPY could fall to around 170 in 2027.

If turbulence in European financial markets further intensifies, this target level could be reached even earlier.

This means that beyond Japan's domestic monetary policy and FX intervention expectations, risk changes in European markets could also become an important factor driving EUR/JPY lower.

AUD/JPY Also Faces Downside Risk, May Fall to Around 105

In addition to the euro, Citi also warns that AUD/JPY faces further decline risk.

The bank believes AUD/JPY could fall back to around 105 in the foreseeable future.

The Australian dollar is typically sensitive to global economic growth prospects and investor risk appetite, while the yen is easily affected by a combination of Japan's monetary policy and changes in global risk sentiment.

Therefore, if the yen receives sustained support, AUD/JPY could also face downward pressure.

Overall, Citi's assessment of yen cross rates mainly depends on two forces: potential Japanese foreign exchange intervention and rising interest rates are favorable for yen strength, while the recovery in risk appetite brought by rebounds in U.S. and Japanese stock markets could re-drive yen depreciation.

Against this backdrop, Citi expects that further upside for both EUR/JPY and AUD/JPY is limited.