Yen’s Woes Seem Too Big for Even a BOJ Hike This Month to Solve

(Bloomberg) -- Yen traders buffeted by suspected intervention once more have a number of speed bumps to navigate before a showdown with the Bank of Japan on the last day of the month.

Despite the boost from the apparent intervention and a favorable drop in US bond yields that weighed on the broader dollar, the yen still ended last week up less than 2% against the greenback. That suggests it’s going to need more help from Japanese authorities in order to decisively break out of its downward trend. 

The yen’s 11% decline this year is adding to Japan’s inflationary pressures, keeping open the possibility that the BOJ will increase interest rates on July 31 for just the second time since 2007. Traders are focusing on data Friday that’s expected to show the nation’s inflation rate edged up to 2.9% in June, according to a Bloomberg survey of economists, well above the BOJ’s 2% target.  

 “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,” said Yujiro Goto, head of FX strategy at Nomura Securities Co. in Tokyo. The apparent intervention keeps pressure on the BOJ to tighten policy to match, Nomura said in a note Thursday. 

The probability of the BOJ raising rates by 10 basis points has fallen to 51% from 59% before the yen’s climb on Thursday, according to swap markets. That leaves room for the yen to rally should the central bank deliver an increase, but even then any advance may be insufficient for it to break out of a bear trend.

And some analysts have suggested if the BOJ hiked in addition to announcing a reduction in bond purchases, its actions risk being seen as driven by the volatile currency and not its mandate to stabilize prices. 

Yen Jump Eases Pressure on BOJ to Tighten Policy, Analysts Say

For Goto, if the central bank hikes by 15 basis points, that might lead to a 2-3 yen gain for Japan’s currency, but a rate rise alone won’t likely be sufficient to shift the direction of the FX pair. Swaps indicate just around a 35% chance of an increase of that amount. 

Similarly, while Barclays Bank PLC predicts the BOJ will raise its target to 0.25% this month, it sees only a limited currency impact and forecasts the dollar-yen rate will end the quarter at 160. The currency traded around 158 per dollar on Friday.

A Bloomberg analysis of central bank accounts suggest Japan likely spent around ¥3.5 trillion ($22 billion) on Thursday to prop up the yen — marking what appeared to be the third intervention this year.

“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, Singapore-based head of FX and EM macro strategy for Asia at Barclays.

Yen bulls may well then end up hoping that US retail sales data, due on July 16, signal the world’s largest economy is slowing. That should put pressure on Treasury yields to decline further, weighing on the dollar-yen rate. However, if the data comes in strong their focus will quickly revert back to the BOJ’s policy decision.

“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 Ltd. in Sydney. 

Here are the key Asian economic data this week:

©2024 Bloomberg L.P.