Credit Agricole notes that with USD/JPY holding above the 159.00 level, the currency pair is keeping in a region that might incur the wrath of Japan’s ministry of finance once again. That fits more or less with how markets are feeling too, as price action has been a little more cautious as of late. Traders know very well that if they take things back to the 160.00 mark, Tokyo officials will almost feel compelled to step in. Japan’s Finance Minister Satsuki Katayama as well as US Treasury Secretary Scott Bessent both verbally intervened to support the JPY last week, but to little avail.
And while BOJ Board and committee members have been switching to supporting another rate hike in June, this is offering little to support to the JPY for several reasons: (1) the market is already 80% priced for a June rate hike; (2) the shift in BOJ pricing has not been as dramatic as the shift in pricing for the Fed or other G10 central banks; and (3) oil prices remain elevated and a drag on Japan’s terms of trade. It would take a hawkish hike by the BOJ in June and/or significantly weaker oil prices to improve the JPY’s prospects. A hawkish hike would be very uncharacteristic of the BOJ.”
Their view suggests that it will take a more hawkish tilt by the BOJ to really help the yen get off the floor. But at the same time, it will be tough to see such a dramatic shift in stance by the central bank.
It is a fair take though. While the BOJ is expected to perhaps a deliver a rate hike next month, we’ve always seen policymakers look to quickly shift back in favour of optionality immediately after. And this time around, I would expect nothing less by the BOJ as the stakes are certainly high if they are to make a policy mistake.
Mind you, they are going to be raising interest rates at a time when the Japanese economy is being hammered by higher energy prices, a worsening fiscal outlook, and the inflation outlook being muddied by cost-push factors
