Rabobank’s Senior FX Strategist Jane Foley reviews Japan’s FX intervention and its impact on USD/JPY. Foley notes that USD/JPY is about 3% below pre-July levels, allowing the Ministry of Finance (MoF) to claim some success, but stresses that Japan’s fundamentals and Bank of Japan (BoJ) policy remain crucial. Foley sees scope for USD/JPY trading in the 158–157 area over a 3–6 month horizon.
Japan intervention and BoJ policy risks
“The fact that USD/JPY remains below its pre-July intervention levels suggests that the MoF could claim that its coordination action with the US Treasury was a success. That said, the complexity of variables driving FX markets suggests that it may only be clear with hindsight whether Japan’s fundamentals have altered sufficiently to justify a stronger currency. For now, the JPY is not out of the woods.”
“Even though the consensus in the Bloomberg survey does not see a return to USD/JPY 160 level this year, most forecasters would likely agree that it would be foolhardy to rule such a move out.”
“The government has now indicated that it is supportive of tighter monetary policy. But, for the JPY to strengthen, the market will likely need clear evidence of a more proactive stance from the BoJ in addition reassurances about JGB supply. Fiscal concerns are set to persist at least until 2027 budget negotiation are underway later in the year, and potentially well beyond.”
“The longer USD/JPY can hold below 160, the more the MoF will be able to project the impression that the intervention has been successful. A key challenge for the MoF will be how the JPY reacts to the BoJ’s September 18 policy meeting. Market expectations of a 25-bps rate hike have increased, suggesting the JPY could be vulnerable on a steady policy outcome.”
“If the BoJ does hike rates, the MoF may repeat its July strategy of fanning the market move with more intervention. In our view, fear of further FX intervention in support of the JPY coupled with the prospect of a BoJ September rate hike and the softer USD suggests scope for USD/JPY to trade in the 158-157 area on a 3-to-6-month view.”
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
