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- The USD/JPY pair is likely to remain supported as the Bank of Japan has few options to sustainably strengthen the yen.
- Direct intervention is only a quick fix and needs support from high interest rates to work sustainably.
- This pair is likely to be a dollar correlation, as any declines may result more from a weaker US dollar than a stronger Japanese yen.
USD/JPY is likely to be a one-sided marriage, with the US dollar (USD) dominating the partnership, according to analysts. Any declines are likely to result from a weaker US dollar rather than a stronger Japanese yen
The Japanese authorities are forced to take drastic measures to support their currency due to concerns about the negative impact of the weak yen on Japanese companies. The little strength the yen mustered in April and May was due to direct intervention by the Bank of Japan in currency markets.
Record interventions
Data Released by Bank of Japan This week shows that it bought a record 9.8 trillion yen between April 29 and May 29 and intervened twice during this period – on April 29 and again on May 2.
USD/JPY daily chart
The USD/JPY pair has drifted steadily higher since its May 3 low of 151.86 immediately after the second intervention from the Bank of Japan, proving that the intervention only had a short-term impact.
For direct intervention to be truly long-term, it must be coupled with tougher policy from the Bank of Japan, or higher interest rates. Higher interest rates make the currency more attractive to foreign investors as a place to park their capital, attracting larger inflows.
“The second intervention led USD/JPY From 158 to 153, but the pair has since rebounded to trade near 157.30 currently. Until the Bank of Japan sets a more aggressive tightening course, the yen is likely to remain weak. However, the interventions have stabilized the yen in the 155-160 range, at least for now, analysts at Brown Brothers Harriman (BBH) say in a note on Friday.
Japan’s base interest rate, set by the Bank of Japan, is between 0.0 and 0.1%, one of the lowest in the world. This explains the continuing decline in the value of the yen. While inflation rose sharply in most parts of the world after Covid-19 – leading most central banks to raise interest rates – this was not the case in Japan. The result is that the country’s currency fell like a stone.
Bank of Japan board member Adachi Seiji said this week that the Bank of Japan may raise interest rates solely to strengthen the yen, but analysts say that would be a mistake.
“A rate hike may be viewed as a mistake if it comes at a time when there are no inflationary pressures and the economy is weak. Markets are already showing signs of stress – and implied volatility in options over the next two weeks has risen significantly as the period now includes the upcoming Bank of Japan meeting,” says Volkmar Bauer, FX analyst at Commerzbank.
Raising interest rates too quickly could backfire on the Bank of Japan, pushing inflation even lower and forcing them to correct their steps, only delaying the yen’s inevitable weakness for later.
The Bank of Japan is running out of options
The Japanese Yen (JPY) is limited in how far it can rise because economic conditions in Japan do not guarantee that the Bank of Japan (BoJ) will raise interest rates. According to Power, the Bank of Japan is “running out of arguments.”
“The Bank of Japan has a problem. It continues to signal that it wants to raise interest rates again. However, it also appears that it is running out of convincing arguments. Although inflation in the Tokyo area rose in May, data released this morning showed that The increase is mainly due to higher energy prices.
Although headline inflation in the Tokyo area rose in May signaling the same for the rest of the country, core inflation in the capital (excluding food and energy) actually fell from 1.4% to 1.3%, leaving it well below the inflation target. Set by the Bank of Japan at 2.0%. .
And the results of “shunto” (which translates to “spring wage offensive”) wage negotiations between unions and employers, which are due to be published in the April monthly labor survey next week, are unlikely to convince markets that profits are rising as much as they should. Enough to push inflation higher.
“Our chief Japanese economist estimates that only about half of companies should have incorporated Shunto revisions into actual wages as of April,” says Galina Pozdnyakova, research analyst at Deutsche Bank.
Overall, the future looks bleak for the yen, and Japanese currency officials may have to rely on chance and the US dollar to ease the pressure, rather than the Japanese economy.
