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20.06.2023 03:21 PM
USD/JPY: Yen falls into a trap
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The Japanese yen has fallen into a trap of policy divergence. While the BoJ, at its June meeting, decided to maintain control over the yield curve and the overnight rate at the same level, its counterparts in other developed countries are tightening their monetary policies. As a result, the USD/JPY pair is rapidly rising, and the EUR/JPY quotes have reached a 15-year high.

Central bank rate hikes lead to an increase in bond yields. In June, Australia and Canada were the initiators of this process. They raised borrowing costs after a pause, surprising investors. And there's more to come. The ECB has taken another step towards monetary tightening, and the Fed has hinted at the continuation of the cycle in July. The Bank of England and the Swiss National Bank are next in line, which may raise rates by 25-50 basis points.

Against this backdrop, the Bank of Japan appears to be a peculiar outlier. It stated that inflation would slow down by the end of the year. Therefore, it is necessary to patiently maintain monetary stimulus. The majority of Reuters experts were expecting such a result from the June BoJ meeting. It significantly weakened the yen, with its trade-weighted exchange rate reaching a record low.

Yen's trade-weighted exchange rate dynamics

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This circumstance increases the cost of imports and causes dissatisfaction within the Japanese government. They increasingly resort to verbal interventions. Finance Minister Shunichi Suzuki stated that he continues to closely monitor events in the Forex market and will take measures in the field of currency policy if necessary. Minister of Economy, Trade and Industry Yasutoshi Nishimura claims that officials are monitoring any excessive or speculative events in the currency market.

As the experience of autumn 2022 shows, verbal interventions in the Forex market achieve nothing. Currency interventions are needed. Last year, Tokyo spent about $65 billion on them. The Ministry of Finance and the central bank sold USD/JPY through intermediaries when it approached the levels of 146 and 152. This time, most Reuters experts predict that the red line will be at the 145 level.

The yen has a tough time. The stabilization of underlying inflation in developed countries forces central banks to resume or continue cycles of tightening monetary policy. This leads to an increase in bond yields and widens their spreads with Japanese counterparts. As a result, carry traders come into play. Players take advantage of the difference by buying income-generating assets and selling funding currencies, such as the yen.

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The future dynamics of USD/JPY will depend on Jerome Powell's readiness to confirm two acts of monetary tightening by the Fed in 2023, each by 25 basis points. The Federal Reserve Chairman will speak before the House of Representatives and the Senate.

Technically, on the daily chart, USD/JPY has precisely executed a buying strategy on the breakout of the previous fair value at 139.9 and the upper boundary of the triangle at 140.2 and 140.4. Utilize the current pullback to increase long positions towards 142.5 and 144.

Marek Petkovich,
Analytical expert of InstaForex
© 2007-2025
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