Once again, we are at a hugely important level for USD/JPY. Interestingly, we dug out an article we wrote over 16 months ago where we asked if 145 was a line the sand for Japanese authorities. Fast forward to today, and that level is now 155 and many questions are being asked about whether this is now the critical level to defend.
As is often the case in these situations, we understand there is much speculation about “checking rates” on FX desks at investment banks in USD/JPY. Essentially that is when the Ministry of Finance in Japan is on the end of the phone line, and currency traders know that we are close to some kind of intervention to stem the weakness in the yen. Or at least, it is a signal that forceful action is imminent. Whether that is enough to stop the current trend remains to be seen.
A few weeks ago, USD/JPY recently surged through the previous intervention level just below 152. That was thought to be a “line in the sand” for obvious reasons, as it is where Japan spent over $70 billion defending their currency in October 2022. We’ve seen several of these crucial levels over the past few years, with 130, 140 and 145 spouted as key markers.
The Ministry of Finance in Tokyo and other officials often then have various stages before direct intervention takes place. Initially this will include “jawboning” where various representatives complain about extreme and disorderly movements in their exchange rate. This often then precedes comments about “closely monitoring” price action and then the threat of determined action if necessary.
Divergent rates and central bank meetings
Yield differentials are key for FX markets, and these have widened significantly recently with Fed rate cuts bets being priced out. Markets now predict around 42bps of rate cuts for this year. This was double that just a month ago and around 150bp at the start of the year.
In contrast, the Bank of Japan meet on Friday, and they are not likely to change policy settings. This comes after their symbolic move in March to exit out of negative rates and also remove yield curve control. Upward revisions to inflation forecasts are anticipated, due to strong wage growth and increased Q1 inflation. That will put it on a path back to the bank’s target by 2026. However, rate setters are expected to proceed very gradually with further rate hikes, given the ongoing weakness in private consumption as well as uncertainty regarding the outlook for small and medium-sized companies.
The BoJ will also have to contend with the Fed meeting next week, in which the FOMC will probably admit the inflation improvement in the US has stalled and policymakers are nowhere near easing policy, which further supports USD/JPY.
The near-term and history
For now, the yen is in a tough place. Easing geopolitical tensions means safe haven buying of the yen is being unwound. Yet, structurally higher US Treasury yields are hampering a yen comeback and a move lower in USD/JPY. It seems only an about-turn in US exceptionalism can turn the tide in the major. That means weaker data over a protracted period of time to put Fed rate cut bets back on the table.
As we wrote previously, the history books also tell us that US support is critical for turning around momentum in a deep-rooted currency trend. Direct, unilateral intervention almost never works when it is done solely by Japanese authorities. For now, the BoJ will likely highlight the currency as an issue, but the authorities at the Ministry of Finance face an uphill battle at present.