Yen traders faced renewed challenges from suspected intervention efforts last week, underscoring the hurdles ahead before a crucial Bank of Japan (BOJ) meeting at month-end.
Despite an apparent intervention and a dip in US bond yields that favored the broader dollar, the yen closed the week with a modest uptick of less than 2% against the greenback. This suggests that additional support from Japanese authorities may be necessary to decisively reverse its downward trajectory.
The yen’s year-to-date drop of 11% is exacerbating Japan’s inflationary concerns, heightening expectations that the BOJ might raise interest rates on July 31 for only the second time since 2007. Analysts are eyeing upcoming data that is anticipated to show Japan’s inflation creeping up to 2.9% in June, well above the BOJ’s 2% target, according to a Bloomberg survey.
Yujiro Goto, head of FX strategy at Nomura Securities Co., emphasized, “If the yen remains weak heading into the July meeting, the BOJ may need to consider an early rate hike alongside reductions in Japanese government bond purchases.” This view was echoed by Nomura Securities Co., which highlighted the ongoing pressure on the BOJ to align its policy tightening with recent interventions.
Market sentiment regarding a 10-basis point rate hike by the BOJ has shifted, dropping to 51% from 59% before the yen’s recent gains on Thursday, according to swap markets. This leaves room for a potential yen rally if the central bank proceeds with an increase, although analysts caution that any rebound may struggle to overturn the current bearish trend.
Concerns also linger among analysts that pairing a rate hike with a reduction in bond purchases could undermine the BOJ’s credibility in stabilizing prices, potentially linking its actions too closely with currency volatility.
“Even with a 15-basis point hike, we might only see a modest appreciation of 2-3 yen for Japan’s currency,” Goto predicted, reflecting a market expectation of about a 35% likelihood for such an increase based on swaps.
Barclays Bank PLC anticipates the BOJ raising its target to 0.25% this month, yet forecasts a limited impact on currency markets, with the dollar-yen rate expected to stabilize around 160 by quarter-end, slightly below the current rate of around 158 per dollar.
A Bloomberg analysis estimates that Japan spent approximately ¥3.5 trillion ($22 billion) in Thursday’s intervention to bolster the yen, marking what appears to be the third such intervention this year.
Mitul Kotecha, head of FX and EM macro strategy for Asia at Barclays, noted, “While yen weakness heightens expectations of a BOJ rate hike this month, significant yield differentials between domestic and overseas markets may prevent a sustained reversal.”
Yen bulls are pinning hopes on upcoming US retail sales data, slated for July 16, which could signal a slowdown in the world’s largest economy and ease pressure on Treasury yields, thereby weighing further on the dollar-yen rate. However, strong data would refocus attention swiftly on the BOJ’s impending policy decision.
“If rates remain unchanged, renewed selling pressure on the yen is likely,” commented Ray Attrill, head of FX strategy at National Australia Bank Ltd., underscoring the volatility ahead in currency markets.
