MUFG’s Lee Hardman notes the Japanese Yen has strengthened modestly as markets anticipate a faster pace of Bank of Japan policy tightening. A Bloomberg report suggests Prime Minister Takaichi’s government supports a near-term BoJ hike, likely in September or October, while Kyodo highlights that joint FX intervention was enabled by Governor Ueda’s hawkish stance. Rising USD/JPY towards 160.00 keeps intervention risks in focus.
BoJ hike expectations and FX intervention
“The yen has strengthened modestly overnight supported by building expectations for a faster pace of BoJ policy tightening. The main trigger has been a Bloomberg report stating that Prime Minister Takaichi’s government is supportive of a near-term BoJ hike, with the next move likely in either September or October, according to people familiar with the matter. The report goes on to add that the BoJ’s fears over yen weakness driving up prices and the government’s desire to strengthen the impact of the recent US-Japan currency intervention are aligning them on the need for a near-term hike.”
“The impact on Japanese rate market pricing has been relatively limited given that market participants had already moved in recent weeks to fully price in a hike by October and there are currently around 19bps of hikes priced in by September. The Bloomberg report fits with our own initial view that there was likely an agreement to allow the BoJ to continue to normalize policy in exchange for the US providing support for the yen through joint intervention at the end of July.”
“Kyodo news had also reported earlier this week that joint intervention was reportedly made possible by BoJ Governor Ueda’s hawkish comments at the 31st July policy meeting. Governor Ueda had stated explicitly that, if necessary, the BoJ would “accelerate the pace of rate hikes”. The US was reportedly concerned that delays in raising rates would lead to excessive yen weakness, which in turn could fuel further inflation and higher long-term interest rates, with repercussions across financial markets.”
“The report went on to conclude that the BoJ has “effectively left itself with no option other than a rate hike at its next Monetary Policy Meeting on 17th-18th September”.”
“With USD/JPY rising back towards the 160.00-level, market participants will be watching closely to see if Japan is willing to step back into the FX market to support the yen. At the very least Japanese policymakers will be hoping the heightened threat of intervention helps to slow the pace of yen weakness. Recent price action highlights that it will be difficult for the BoJ to avoid hiking rates in September and disappointing market expectations which would encourage further yen selling.”
