Japanese Yen: Intervention ceiling guides BoJ path – BNY

BNY’s Geoff Yu highlights strong Japanese Yen flows and a declining USD/JPY as markets hesitate to challenge Japanese and U.S. authorities. He argues that heavy post-intervention selling has largely run its course and that around 160 in USD/JPY now acts as a practical intervention ceiling. Yu also notes BoJ rate-hike discussions and skepticism that intervention alone can deliver sustained Yen appreciation.

Authorities deter fresh Yen shorts

"JPY is back in focus. USD/JPY has continued to decline, as markets remain hesitant to test the Japanese and U.S. authorities’ resolve to defend the yen. Deterrence has been established for now."

"Our data show that JPY flows on Tuesday were the strongest since mid-July, supporting our view that JPY selling has largely run its course after heavy post-intervention sales in July. Investors initially used yen strength to rebuild carry trades or hedge Japanese exposures, and neither the dovish FOMC reaction in July nor the Treasury buyback announcement materially changed that pattern. While investors are not yet building outright JPY longs on a significant scale, 160 increasingly looks like a practical intervention ceiling, making markets more reluctant to add fresh shorts and raising the risk of renewed pre-intervention buying."

"The more likely outcome is therefore asymmetric: unilateral or multilateral intervention and political constraints can cap USD/JPY around 160, even if the underlying macro backdrop is not yet strong enough to drive JPY materially higher."

"We remain skeptical that Japanese authorities can generate sustained JPY appreciation through intervention alone. The government’s policy mix remains reflationary, whereas today’s backdrop is very different from the early Abenomics period: inflation is already materially higher and structural reform is less prominent. However, that does not mean the yen must weaken further."

"Amid a sharp downward move in USD/JPY, reports suggest the BoJ is leaning toward a 25bp rate hike to 1.25% at its September 18 meeting, while keeping the option of faster tightening open if inflation risks intensify."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)