USD/JPY climbs relentlessly ahead of BoJ meeting

• The USD/JPY extends its uptrend despite verbal intervention from the Minister of Finance. 
• The wide differential between US and Japanese interest rates is seen as a major factor contributing to the rise. 
• The idea that a lot is already priced into the US Dollar could limit USD/JPY upside.

The USD/JPY trades higher on Thursday, rising into the mid 155.00s, on the back of a recent step-rise in US Treasury Bond yields as the pair shrugs off yet more verbal intervention from the Japanese Finance Minister (MOF) Sunichi Suzuki. 

USD/JPY is pressured higher by the wide differential between US and Japanese interest rates, with the US Federal Reserve (Fed) setting the Fed Funds Rate at 5.25% - 5-50% and the Bank of Japan (BoJ) its cash rate at 0.0% - 0.1%. The huge advantage of parking capital in US Dollars (USD) compared to Japanese Yen (JPY) is a constant bullish factor for USD/JPY. 

In a statement to Parliament on Thursday, Sunichi Suzuki reiterated the tired phrase that the Finance Ministry would be “watching FX market closely” and “will take appropriate measures” if the Yen depreciates further. Yet his attempts at verbal intervention seem to be losing force with each repetition as the pair pushed higher regardless. Analysts remain skeptical about the impact even of direct intervention on the pair. 

“Even actual interventions, if they came, would hardly make a lasting impression on the market, because the MOF's firepower is limited,” says Antje Praefcke, FX Analyst at Commerzbank. 

For any lasting effect on the valuation of the Yen, the MOF’s interventions would have to be accompanied by interest rate hikes from the BoJ. 

“..interventions would have to be flanked by a credible monetary policy on the part of the BoJ, i.e. a regular cycle of interest rate hikes, in order to be convincing, otherwise they would just be "leaning against the wind" anyway. However, since we do not believe in a rate hike cycle, we simply lack the arguments for a rising JPY,” says Praefcke. 

BoJ meeting on the radar

Approaching quickly down the road is the next BoJ policy meeting which is scheduled for 3.00 GMT on Friday morning, but the market does not expect a change in policy so soon after the BoJ hiked interest rates in March. At most Ueda and his team are expected to raise their inflation forecasts. 

“The BOJ may raise slightly its 2024 core inflation projections implying greater room to tighten policy and can offer JPY near-term support,” says Brown Brothers Harriman (BBH) in a report. 

Core inflation (ex fresh food) in March tracked at 2.6% versus the 2.4% forecast by the BoJ and “core of core” inflation (ex fresh food and energy) at 2.9% versus the 1.9% forecast by the bank. 

Tokyo Consumer Price Index (CPI) data, released a few hours prior to the BoJ meeting, could impact deliberations, if it varies substantially from consensus. However, the overall view is that the BoJ is unlikely to actually alter policy much given trend inflation remains below its 2.0% target. 

“We are sticking to our view that the BOJ tightening cycle will be modest because underlying inflation in Japan is trending lower. The swap market implies 25 bps of rate hikes in 2024 and 50 bps over the next two years,” says BBH.

US Dollar “already has a lot priced in” – Commerzbank

USD/JPY may be limited in its scope for upside, however, by the fact USD “already has a lot priced in”, according to analysts at Commerzbank. 

This is particularly in regards to the acute shift in market expectations regarding the future course of interest rates in the US.

Since the Federal Reserve’s (Fed) March meeting markets have consistently pushed back the date when the Fed is expected to begin cutting interest rates. 

This recalibration of the future path of interest rates has now been fully priced in, according to Commerzbank’s Praefcke, and in the absence of more catalysts, makes USD more vulnerable to “bad news” than “good news”. 

“..a lot is already priced into the Dollar, such as a soft landing of the economy or a Fed that will only cut the key interest rate much later than previously thought,” says Praefcke. 

“It is becoming increasingly difficult for the Dollar to benefit from facts and figures that underpin this expectation (a delay in future rate cuts); on the contrary, it tends to react sensitively when the market has doubts about its current expectation in the face of not-so-good data. The Dollar is gradually running out of steam, although it is currently the undisputed most popular currency and is likely to remain so,” adds the analyst. 

If her view is valid it could color the FX market reaction to US first quarter GDP data out on Thursday. Even a better-than-expected result may not push USD/JPY that much higher, whilst a weaker-than-expected result could see the pair drop back more substantially.