• The USD/JPY extends its uptrend despite verbal intervention from the Minister of Finance. 
  • The wide differential between US and Japanese interest rates is seen as a major factor contributing to the rise. 
  • The idea that a lot is already priced into the US Dollar could limit USD/JPY upside.

On Thursday, the USD/JPY pair climbed into the mid-155.00s, driven by a recent rise in US Treasury Bond yields, despite continued verbal intervention from Japanese Finance Minister Sunichi Suzuki.

The widening gap between US and Japanese interest rates is exerting upward pressure on USD/JPY, with the US Federal Reserve maintaining the Fed Funds Rate at 5.25% – 5.50% and the Bank of Japan holding its cash rate at 0.0% – 0.1%. This interest rate discrepancy favors holding capital in US Dollars (USD) over Japanese Yen (JPY), providing a consistent bullish factor for USD/JPY.

Despite Suzuki’s repeated statements to Parliament about closely monitoring the FX market and taking necessary actions if the Yen weakens further, verbal interventions seem to have diminishing impact as the pair continues to rise. Analysts express doubts about the effectiveness of direct intervention on USD/JPY.

Even if interventions were to occur, their impact on the market would likely be limited due to the Ministry of Finance’s constrained resources,” explains Antje Praefcke, FX Analyst at Commerzbank.

For interventions to have a lasting effect on the Yen’s valuation, they would need to be supported by interest rate hikes from the Bank of Japan.

The effectiveness of interventions would rely on a credible monetary policy from the BoJ, including a consistent cycle of interest rate hikes. Without such a policy, interventions would likely have little impact,” adds Praefcke.

The upcoming BoJ policy meeting scheduled for 3:00 GMT on Friday is anticipated by the market, although no policy changes are expected soon after the BoJ raised interest rates in March. The BoJ may revise its inflation forecasts upward, which could provide near-term support for the JPY.

The Tokyo Consumer Price Index (CPI) data released before the BoJ meeting may influence deliberations, but overall, the BoJ is unlikely to alter policy significantly as inflation remains below its 2.0% target.

Commerzbank analysts suggest that the scope for upside in USD/JPY may be limited, as the US Dollar has already priced in expectations regarding future interest rate cuts by the Federal Reserve. This makes the USD more susceptible to negative news than positive news.

“If the market begins to doubt its current expectations in the face of less favorable data, the Dollar could react sensitively. The Dollar’s momentum is waning, despite its current popularity,” notes Praefcke.

This perspective could affect the FX market’s reaction to US first-quarter GDP data released on Thursday, with even positive results unlikely to significantly boost USD/JPY, while weaker-than-expected results could lead to a more pronounced decline in the pair.

Related Post