The Bank of Japan has stepped up its hawkish rhetoric, aiming to bring rates to a neutral level as quickly as possible. However, the government would prefer to see no changes. As a result, the yen is suffering. Let’s analyze the situation and develop a trading plan for the USD/JPY pair.
The article covers the following subjects:
Major Takeaways
- Fears of intervention are boosting the yen.
- The Bank of Japan risks falling behind the curve.
- The government has announced fiscal stimulus measures.
- Short positions can be considered if the USD/JPY pair falls below 161.5.
Weekly Fundamental Forecast for Yen
Every cloud has a silver lining. The yen is trading near 40-year lows against the US dollar, yet over the past month it has been one of the best-performing G10 currencies. The USD/JPY pair may climb even higher, but investors are concerned about the government’s intervention in the Forex market above the 162 level. The Finance Ministry is prepared to act boldly in coordination with its US allies. However, this is not the only reason for the yen’s success.
Performance of G10 Currencies
Source: Bloomberg.
One of the key factors behind the yen’s weakness was the conflict in the Middle East. Japan is a net importer of energy commodities, receiving more than 90% of them from Gulf countries. Therefore, rising oil prices, coupled with increased demand for the US dollar as a safe-haven asset, pushed the USD/JPY to its highest level since 1986. However, in June, Brent prices declined, allowing bears to take a breather.
The Bank of Japan’s hawkish rhetoric also supported bears. Kazuo Ueda believes that inflation approaching 2% and the current accommodative financial conditions allow the BoJ to continue its cycle of monetary tightening. Meanwhile, BoJ Policy Board member Naoki Tamura warns of the risk of falling behind the curve. If consumer prices rise too rapidly, interest rates will have to be raised aggressively, which would harm the economy.
Tokyo CPI YoY
Source: Bloomberg.
Against the backdrop of the first acceleration in inflation in Tokyo in the past eight months, the hawkish rhetoric seems appropriate, but it is unlikely to be part of the government’s plans. The investment stimulus program announced by Sanae Takaichi, totaling ¥370 trillion—equivalent to $2.3 trillion—over the next 14 years, refers to the need for cooperation between the Bank of Japan and the Cabinet. The main focus is on stimulating domestic demand. As a rule, such issues require lower interest rates, not higher ones.
To implement her plans, Sanae Takaichi is seeking to fill the Board of Governors with doves. However, this will take time—time that the BoJ could use to bring the overnight rate to a neutral level more quickly.
The struggle between the government and the central bank could hurt the yen. When a similar situation occurred in the UK in 2022, Prime Minister Liz Truss was forced to resign, and the pound plummeted to record lows against the US dollar.
The fragile peace in the Middle East and numerous unresolved issues carry the risk of conflict escalation and a rise in Brent crude prices. Under such conditions, currency interventions will once again prove ineffective.
Weekly USDJPY Trading Plan
Investors should once again factor in geopolitical risks. Government intervention in the Forex market appears increasingly likely. Short positions on the USD/JPY may be considered if the price breaks below the 161.5 support level. However, investors should also assess whether a subsequent buying opportunity is a viable strategy.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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