USD/JPY Seen Remaining Bid Despite BoJ Intervention Threat

Key Points

• USD/JPY pulled back aggressively from earlier highs around 145 to around 143 on Wednesday amid the threat of BoJ intervention.
• The BoJ, which acts on behalf of the Japanese MoF regarding intervention, reportedly conducted “rate checks”.
• Analysts see intervention as unlikely, and any intervention-induced USD/JPY dip to be bought into anyway.

BoJ Conducts “Rate Check”

Headlines during Wednesday’s Asia Pacific session suggesting that the Bank of Japan is taking steps that could precede outright FX market intervention to prop up the value of the yen triggered a reversal lower in USD/JPY, with the pair now trading around 143.0 after earlier probing the 145.0 area.

The BoJ reportedly conducted a “rate check”, which means it asked Japanese FX dealers for direct prices ahead, a step it has taken in the past ahead of direct market interventions. When it comes to FX market intervention, the BoJ acts at the behest of the Japanese Ministry of Finance.

Japanese Finance Minister Shunichi Suzuki on Wednesday told market participants that any intervention would not be announced in advance, and would likely not be confirmed in its aftermath. Suzuki and other Japanese officials have been jawboning about the negatives associated with excessive yen weakness in the past few days as USD/JPY has pushed to fresh multi-decade highs.

Normally, a weaker yen is viewed as favorable by authorities given the associated boost to Japanese exports. But given the extent of the yen’s decline this year (around 30% versus the US dollar) and the surge in global energy prices, yen weakness is hurting Japanese businesses and consumers.

The yen has underperforming its major G10 peers this year as a result of the BoJ’s continued commitment to its ultra-dovish policy stance at a time when other major central banks like the Fed, BoE and ECB have been aggressively raising interest rates to curb rampant inflation. This has triggered a significant widening of G10 (ex-Japan)/Japanese rate differentials, battering the yen.

Intervention Viewed as Unlikely

Analysts noted on Wednesday that, given Japan is a signatory to the G7 and G20, and as such has signed policies about refraining from FX market intervention, direct intervention remains unlikely.

“My feeling is that the MOF won’t intervene at this stage and will leave it at verbal warnings,” said the chief economist at the Tokyo-based Norinchukin Research Institute, according to Reuters. “There’s still a week before the Fed’s rate-setting meeting… I don’t think markets believe the ministry will intervene at current dollar/yen levels,” the chief economist said.

Further verbal warnings could come directly from BoJ Governor Haruhiko Kuroda and his colleagues at next week’s BoJ meeting. The bank is not expected to signal any intentions to deviate from its ultra-dovish policy stance of rates at -0.1% and continued yield curve control.

USD/JPY to Remain a Buy on Dips, Even if BoJ Intervenes

“Were there BoJ FX intervention, Japanese authorities could easily sell around $5bn… That could trigger a brief dollar correction,” said ING analyst Chris Turner in a note on Wednesday. “However, the dollar is up here for good reasons and we would expect the macro hedge fund community to be happy to buy dips on any 2-3% correction in USD/JPY,” he added.

For now, Turner thinks the dollar will remain bid “as the market awaits a hawkish FOMC meeting next week”.