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Currency interventions failed to force USDJPY bulls to flee from the market. However, to reverse the uptrend, the USDJPY pair needs both the slowdown in the US economy and the Bank of Japan’s firm decisions. Let’s discuss the Forex outlook and make up a trading plan.
Weekly fundamental forecast for Japanese yen
The world is teeming with signs and symbols. The fact that 10-year Japanese bond yields have soared to their loftiest levels since ex-Bank of Japan Governor Haruhiko Kuroda embarked on his journey with ultra-soft monetary policy in 2013 is far from coincidental. The BoJ’s pivot away from negative rates was envisioned as a catalyst for the yen to shed its label as the primary laggard among G10 currencies. Yet, this ambition fell short. USDJPY bears now face the colossal task of shifting the market’s tide, which is indeed a herculean effort.
Since the start of 2024, the yen has lost about 10% against the US dollar and is heading for a fourth consecutive year of closing in the red. During this time, the Japanese economy has become two-speed: devaluation helps exports and tourism but reduces consumption. After GDP slipped into negative territory in the first quarter, an overnight rate hike no longer looks like something that should restrain the economy. On the contrary, tighter monetary policy could stimulate it by strengthening the yen and boosting consumer and business activity.
Kazuo Ueda stated that Forex exchange rates significantly impact the economy and inflation. Depending on this impact, the Bank of Japan may require a specific monetary policy response. Following Kueda’s statement, Bank of America shifted its forecast for the next overnight rate hike from September to June.
The BoJ needs to go the extra mile to force speculators to abandon the yen short trades that reached record highs in late April. Asset managers and hedge funds have the most pessimistic outlook on the Japanese yen among major world currencies.
JPY speculative net positions
Source: Bloomberg.
Speculators’ positios on world’s major currencies
Source: Bloomberg.
The government and the Bank of Japan have indeed managed to scare speculators, but breaking the USDJPY uptrend requires more than rhetoric and currency intervention from Kazuo Ueda and his colleagues. It takes real action. They need to catch the financial markets off-guard. Most likely, the Japanese regulator is ready to take such a bold step.
According to Jefferies, even if the Fed cuts borrowing costs 1-2 times and the BoJ raises them 1-2 times in 2024, the rate gap will still play to the advantage of USDJPY bulls. It is impossible to save the two-speed economy with a turtle-speed monetary policy normalization. It needs a major revival.
Some are concerned that monetary restraint will increase the cost of servicing the national debt, which is about 265% of GDP. However, when the Bank of Japan is a whale in the pond, as it owns more than half of the bonds issued, the problem looks manageable.
Weekly USDJPY trading plan
The slowdown in the US economy and the BoJ’s shift from caution to decisiveness suggest selling USDJPY if the pair drops below 155.5.
Price chart of USDJPY in real time mode
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