Japanese Yen edges higher amid intervention risks; remains close to four-decade low vs USD

• USD/JPY consolidates as traders remain on high alert amid looming intervention risks.
• The wide US-Japan rate differential keeps the JPY carry-trade active and lends support.
• The focus now shifts to the crucial FOMC and BoJ monetary policy meetings next week.

The USD/JPY pair ticks lower during the Asian session on Thursday as bulls opt to move to the sidelines amid speculations that Japanese authorities will step in to prop up the domestic currency. Nevertheless, spot prices remain close to a four-decade high, touched on Tuesday, and currently trade just above the 163.00 mark.

Japan's Finance Minister Satsuki Katayama reiterated that ​the government was ready to take ‌decisive action on foreign exchange as needed. Apart from this, hawkish Bank of Japan (BoJ) expectations lend some support to the Japanese Yen (JPY), which, along with a modest US Dollar (USD) weakness, acts as a headwind for the USD/JPY pair. The downside, however, remains cushioned on the back of a stark contrast in monetary policy between Japan and the rest of the world.

Despite the recent BoJ rate hike to 1%, or the highest since 1995, and reports that officials are open to raising interest rates at a faster pace, borrowing costs in Japan remain exceptionally low relative to other major economies, including the US. This keeps the so-called carry trade active, which has been a key factor behind the JPY's underperformance. Furthermore, economic risks stemming from energy supply disruptions due to the Middle East conflict undermine the JPY.

Rabobank notes that “over the past few weeks the market has been debating whether the MoF is deliberating over a change of tactics with respect to how it can support the JPY.” However, the bank cautions that, “irrespective of how and when intervention may be deployed, it is unlikely on its own to change the direction of a currency pair.” In Rabobank’s view, “for that to happen, the fundamentals (or the perception of fundamentals) will also have to alter,” underscoring that durable Yen support will ultimately depend on a broader shift in Japan’s underlying economic and policy backdrop rather than on FX operations alone.

In fact, the US and Iran traded strikes for a 12th night in a row, while Yemen's Iran-aligned Houthis opened a new front in the war and declared a blockade on a key Red Sea shipping route. Adding to this, a significant fall in shipping traffic through the Strait of Hormuz lifts crude oil prices to a fresh high since June 11, fueling inflationary concerns. This, in turn, bolsters Federal Reserve (Fed) rate hike bets, which favors USD bulls and limits the downside for the USD/JPY pair.

Traders now look forward to the release of the Weekly Initial Jobless Claims data from the US, which, along with geopolitical developments, should influence the USD. The market attention will then shift to Japan's national consumer inflation figures, due on Friday. The focus, however, remains glued to the highly-anticipated Fed policy decision and the BoJ meeting next week, which should provide cues about the future policy path and provide a fresh impetus to the USD/JPY pair.