MUFG: Yen intervention can only buy time

What’s next after today’s yen intervention:

MUFG analyzes the recent sharp movements in the yen, suggesting that the overnight volatility may indicate unofficial intervention by Japan to support its currency. This potential intervention comes after significant weakening of the yen, especially following the Bank of Japan’s (BoJ) recent policy meeting.

Key Points:

• Yen Volatility and Potential Intervention: The USD/JPY experienced extreme volatility overnight, spiking to a high of 160.17 before dropping back to 155.06. This pattern is reminiscent of the market behavior observed during Japan’s last intervention in the foreign exchange market in the autumn of 2022. Japan’s top currency official’s non-committal response to intervention queries further fuels speculation of government action.

• Lack of Official Confirmation: While there has been no official confirmation of intervention from Japanese authorities, the significant escalation in yen weakening post-BoJ meeting provides a plausible justification for such measures. (update: It was later confirmed, though not officially)

• BoJ’s Recent Policy Stance: The BoJ’s latest policy meeting did not strongly counter the trend of yen weakening, with Governor Ueda not signaling imminent rate hikes nor expressing significant concern over the yen’s recent declines. This stance likely contributed to the market’s continued bearish outlook on the yen.

• Impact of Yen Weakness on Inflation: The current level of yen depreciation is not deemed sufficient by the BoJ to significantly influence the underlying inflation trend, which would necessitate a shift in monetary tightening strategies.

• Effectiveness of Intervention: According to MUFG, direct intervention in the FX market may at best slow the pace of yen weakening but is unlikely to reverse the trend. The intervention, if confirmed, is seen as a temporary measure to buy time for potential shifts in economic fundamentals that could more sustainably support the yen.

Conclusion:

MUFG posits that recent actions suggestive of FX intervention by Japan are likely aimed at temporarily stemming the yen’s decline rather than initiating a long-term reversal. The effectiveness of such measures may be limited unless accompanied by significant changes in Japan’s economic fundamentals or monetary policy adjustments.