Tokyo's New Move Makes a Significant Impact

The yen was volatile Friday after the BOJ conducted so-called rate checks with traders, reinforcing perceptions that authorities intervened in the market earlier to prop up the currency.

This followed a surge of as much as four yen in the minutes after a softer-than-expected reading of US inflation. The spike in volume reinforced conviction that Tokyo had stepped in.

The yen remained the worst-performing major currencies this year though, falling as much as roughly 12% against the dollar, as the BOJ trod too cautiously to narrow the yield spreads.

There was "palpable nervousness in the market" in recent sessions from hedge funds looking to protect carry trades for that kind of scenarios, said Ruchir Sharma, global head of FX option trading at Nomura International.

Rate checks typically happen when volatility increases and verbal intervention appears insufficient to tame currency moves. That was last seen in Sep 2022 to spark immediate intervention.

The yen was easing towards 150 per dollar back then and the subsequent rally lasted several months. Still it touched its weakest since 1986 last week due to an inflation crisis that resulted in eleven Fed rate hikes.

The lately surge was a victory for Japanese authorities, but there will need to be a forceful follow up for the yen to sustain any gains. Therefore, the next BOJ meeting will capture intense attention.

Jigsaw

Japan's top currency official continued to keep speculators on edge amid potential signs of an evolution in Tokyo's yen strategy as he played down a report that government officials had confirmed intervention.

The BOJ reported Friday that its current account will probably fall ¥3.2 trillion on the next business day. That compares with an average forecast increase of ¥333 billion among private money brokers

That gap proved accurate in confirming a government push. In further evidence, Thursday was one of the busiest days for yen spot trading since November 2016, according to CME Group.

Masato Kanda has tried to maximize the impact of currency policy by repeatedly leaving doubt in the market over Japan's actions, which helps to unsettle those aggressive bears.

He is scheduled to step down at the end of July, to be replaced by Atsushi Mimura, who is currently director general of the finance ministry's international bureau.

Japan's import prices have recently risen by around 9.5%, of which 9.2% is down to the weakness of the yen. The weak yen has pushed the nation's trade balance into deficit again in April.

Some economists say the action in the markets made a rate hike more likely because following a government response, while others say it made it more unlikely because pressure on the yen has eased.

Dead End

Yujiro Goto, head of FX strategy at Nomura Securities, said a hike by 15 bps might lead to a 2-3 yen gain for the currency, but a rate rise alone may not be sufficient to shift its direction.

"If the yen continues to trade weakly into the July meeting, the bank would need to consider an early rate hike even as it decides on the pace of Japanese government bond purchase reductions."

Similarly, Barclays sees only a limited currency impact and forecasts the yen will end the quarter at 160 per dollar although it predicts the BOJ will raise its target to 0.25% this month.

"While JPY weakness raises expectations of a BOJ hike this month we think domestic-overseas yield differentials are too wide for a sustained reversal," said Mitul Kotecha, head of FX for Asia at Barclays.

"If there's no change in rates, then we may well see renewed yen selling," said Ray Attrill, head of FX strategy at National Australia Bank. Swap markets show the probability is nearly 50%.

Some have suggested if the BOJ hiked in addition to announcing a reduction in bond purchases, the move could risk being seen as driven by the volatile currency and not its mandate to stabilise prices.

The BOJ has repeatedly said it does not target the yen. Despite that, Kazuo Ueda has not ruled out policy changes if the falling currency rate was seen changing the outlook for inflation.

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