USD/JPY is likely to remain underpinned as the Bank of Japan has few options for sustainably strengthening the Yen. Direct intervention is only a quick fix and needs support from higher interest rates to work sustainably. The pair is likely to be a Dollar-affair with any declines resulting more from USD weakness rather than JPY strength.
According to analysts, USD/JPY is likely to be a one-sided marriage with the US Dollar dominating the partnership. Any declines in the pair are expected to result from USD weakness rather than JPY strength. The Japanese authorities have been taking drastic measures to prop up their currency due to concerns about the negative impact of a too-weak Yen on Japanese businesses. The little strength the Yen has shown in recent months has been due to direct intervention in the FX markets by the Bank of Japan.
The Bank of Japan recently released data showing record interventions, buying a total of ¥9.8 trillion between April 29 and May 29. Despite these interventions, USD/JPY has steadily drifted higher since May 3, indicating that intervention alone has only had a short-lived effect. For long-lasting effects, direct intervention would need to be coupled with tighter BoJ policy or higher interest rates. Higher interest rates make a currency more attractive to foreign investors, attracting greater inflows.
Currently with a base interest rate of 0.0 – 0.1%, Japan has one of the lowest interest rates in the world. This low interest rate explains the persistent depreciation of the Yen. While inflation has risen in most of the world post-Covid, leading central banks to increase interest rates, Japan has not followed suit. Bank of Japan board member Adachi Seiji mentioned the possibility of raising interest rates to strengthen the Yen, but analysts warn that this could be a mistake that backfires on the BoJ.
The Bank of Japan is running out of options to strengthen the Yen. Economic conditions in Japan do not warrant the BoJ raising its policy rate, and the bank is “running out of arguments” according to analysts. Despite a slight increase in headline inflation, core inflation in Tokyo actually cooled, staying well below the BoJ’s 2.0% target. Additionally, the results of Shunto wage negotiations are not likely to impress markets, indicating that earnings are not increasing enough to drive up inflation.
In conclusion, the future looks bleak for the Yen, and Japanese currency officials may have to rely on serendipity and the US Dollar to relieve the pressure, rather than the Japanese economy. The BoJ is facing challenges in trying to strengthen the Yen sustainably, and it remains to be seen how they will navigate these difficulties in the coming months. Despite record interventions, the Yen is likely to remain weak as long as the BoJ does not introduce more hawkish tightening measures or raise interest rates significantly.