Yen Bashing Continues as USD/JPY Closes in on 130

Written on 20/04/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

Japanese Yen Fundamental Analysis

The Japanese currency has dropped over five per cent this month alone and more than 10 per cent this year. This puts it outpacing even the Russian ruble and Argentinian peso as the worst performer among 31 major currencies, with it chalking up its worst losing streak against the dollar in more than half a century.

In recent weeks, after prices broke to the upside above the March high at 125.10, it has seemed inevitable that traders would test the Y130 marker as a potential line in the sand for Japanese authorities. But the market reaction to recent comments from both the Bank of Japan and the Ministry of Finance has been fairly dismissive as traders have appeared to take little notice of remarks aimed at calming the yen’s descent.

Japan’s Finance Minister Suzuki was the most recent official to hit the wires, adopting a marginally stronger one than in previous days, declaring the speed and abruptness of the currency’s move as “undesirable”.

But as loud as this jawboning has become, once again the Bank of Japan overnight offered to buy unlimited amounts of 10-year Japanese Government Bonds at 0.25% in a move that indicated an unchanged, very dovish policy. It is this increasing divergence between the BoJ and other major central bank policies that continues to weigh on the yen.

US 10-year Treasury yields have notched a new cycle peak and are threatening the hugely significant 3% level. The 30-year US Treasury yield has already breached this mark, for the first time since March 2019. There are around 225 basis points of Fed rate hikes priced in by the markets for this year, while the BoJ continues to stick with its yield curve control policy that caps 10-year Japanese Government bond yields at 0.25%.

Yen Impact on Economy

The pressure to intervene will undoubtedly increase as the yen continues its desperate slide. Of course, for all the authority’s rhetoric, JPY weakness is good news for the economy and exports, as well as a factor to spur imported inflationary pressures. This is key when we see that core inflation remains in negative territory and growth is still below pre-pandemic levels.

Above 130, the government may start to worry about consumer’s purchasing power ahead of this summer’s Upper house elections. Clothing and textile industries too, are being hurt substantially by the weaker yen. But the market will do what markets do and test the authorities as much as they can. There is no easy fix and intervention, and jawboning will only be a temporary solution while underlying policy and market dynamics stay as they are.

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