(Bloomberg) -- Thursday’s sharp yen rally on suspected Japanese intervention may reduce pressure on the central bank to tighten monetary policy aggressively at the end of this month, according to several analysts.
If the Bank of Japan raised interest rates in addition to announcing a reduction in bond purchases, its actions risk being seen as driven by the volatile yen and not its mandate to stabilize prices, they said.
The analysts also said that the yen was given a boost by slower-than-expected US inflation data that supports the case for Federal Reserve rate cuts and a weaker dollar.
BOJ Governor Kazuo Ueda said last month that recent yen weakness was a factor for inflation to overshoot and that he was carefully watching the currency. But policymakers probably don’t want to be seen as being forced to act to boost the currency because that may raise questions about their independence, according to central bank watchers.
The finance ministry might have intervened in the currency market “because it saw a low likelihood that the BOJ will carry out dual policy tightening this month that combines bond purchase cuts and an interest-rate hike,” said Shoki Omori, chief desk strategist at Mizuho Securities Co. in Tokyo.
The Japanese currency jumped almost 2% against the dollar on Thursday before giving up some of its gains and fluctuating around the 159 level on Friday. Masato Kanda, Japan’s top currency official, refrained from commenting on whether the Ministry of Finance was behind the move.
Here’s what Bloomberg strategists say...
“There will need to be a forceful follow up for the yen to sustain any gains. The next Bank of Japan meeting is almost three weeks away — a gap into which the MOF should ram home its advantage or risk it being seen as yet another USD/JPY buy-the-dip window for dollar bulls.”
— Mark Cranfield, Markets Live strategist. Read more on MLIV.
“Stronger speculation of a US interest-rate cut reduces the chance of the BOJ being forced to respond to a weaker yen” with an additional rate hike this month, SMBC Nikko Securities Inc. economists led by Yoshimasa Maruyama wrote in a note.
Japan was last suspected to intervene between April 29 and May 2, but it took the currency just under three months to erase gains and weaken to a new low.
Should the BOJ raise rates this month, “monetary policy would be seen as being tied to the exchange rate,” said Takashi Fujiwara, chief fund manager at Resona Asset Management Co.’s fixed-income investment division in Tokyo. “The market would push the central bank to tighten policy when yen depreciation intensifies again.”
Not all experts see the BOJ refraining from raising rates on July 31. Yujiro Goto, chief currency strategist at Nomura Securities Co. in Tokyo, said apparent intervention overnight is expected to boost expectations of a hawkish BOJ decision and increase appreciation pressure on the yen.
But others say the BOJ would want to avoid rushing policy moves. Evidence of that can be seen in its slow action to decrease bond buying — it went through the trouble of talking to market participants and taking a month and a half to make a decision, said Naomi Muguruma, chief fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.
With the policy rate in Japan more than 500 basis points lower than that in the US and 400 basis points in the euro area, the yen still faces considerable headwinds.
“The Ministry of Finance has just given investors an opportunity to buy dollar-yen on dips,” said Mizuho’s Omori. “There’s a good chance that the pair will have rebounded to 161 levels before the next Fed meeting on July 30-31.”
--With assistance from Masahiro Hidaka, Ruth Carson and Garfield Reynolds.
©2024 Bloomberg L.P.
