BNY’s Geoff Yu highlights that the Japanese Yen (JPY) entered the latest Bank of Japan (BoJ) decision and suspected intervention with weak flow momentum and lighter positioning, even as investors remained net long JPY and net short USD/JPY. He argues that fiscal concerns and a lack of policy assertiveness have undermined confidence, but that stronger intervention and clearer BoJ guidance could quickly restore credibility and trigger a sharp mean-reversion rally in JPY assets.

Intervention, positioning and credibility risks

"The BoJ kept policy rates unchanged on Friday, but Governor Kazuo Ueda said the central bank could speed up rate hikes if monetary conditions remain too accommodative. He stressed that currency volatility is increasingly affecting inflation, noting that the yen’s weakness over the past year has raised upside price risks as underlying inflation nears the 2% target."

"JPY entered the BoJ decision and reported intervention with weak flow momentum and lighter positioning. Forward and swap demand had deteriorated, USD/JPY remained better bid, spot purchases were inconsistent and cash flows had turned sharply negative."

"That creates a more asymmetric setup for the yen. Fiscal concerns, the latest budget and the lack of policy assertiveness had undermined confidence, leaving attractive valuations without strong sponsorship."

"U.S. Treasury Secretary Scott Bessent said on Thursday that the Japanese yen looks very undervalued and should strengthen further, while stressing that excessive volatility in the currency isn’t healthy."

"Reported intervention and a firmer BoJ message could change that quickly. Stronger intervention would show that the authorities are prepared to resist further depreciation, while clearer policy guidance would reduce the credibility discount embedded in JPY assets."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)