MUFG’s Derek Halpenny highlights persistent Japanese Yen weakness as USD/JPY trades at levels last seen in 1986, with low volatility undermining the Ministry of Finance’s case for intervention. He notes limited contagion in Japanese bonds but rising inflation and political pressure. Halpenny argues a Bank of Japan rate hike is needed, likely after July, with a more hawkish communication seen as a trigger for repricing.

Yen slide, inflation risks and BoJ outlook

"The USD/JPY rate has hit the highest level since December 1986 and what is noticeable about that is the lack of attention this is now getting. With the move a slow grind and with broader G10 and USD/JPY volatility levels so low the MoF’s justification for intervention is simply not there."

"The 1-month implied volatility in USD/JPY fell below 6% last week for the first time since February 2022. We did get a comment from Finance Minister Katayama who laid the blame for yen weakness solely on the worsening situation in the Middle East but added that “we will take appropriate and bold action at any time, should the need rise”. "

"That’s an interesting caveat – “should the need arise” which clearly suggests a lower sense of urgency than at previous times when intervention took place. There is certainly a shift in urgency in Tokyo which may point to resignation and reluctant acceptance of allowing the yen to weaken as long as the pace of the move is gradual."

"Inflation remains a key risk however (services input prices are growing strongly pointing to upside risks in the coming months) and hence JGBs and the yen are vulnerable to further selling on concerns enough is not being done to reduce inflation risks."

"But the government could see this decline as showing the need to do more and hence points to the benefit of leaving the BoJ to act independently. A hike is needed with inflation pressures building again. A hike is not likely in July but there is only 6bps priced for September when we continue to see the BoJ acting. A more hawkish July communication would likely prompt a shift in expectations."

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