MUFG’s Derek Halpenny highlights growing downside risks for the Japanese Yen as rising US yields and higher Fed hike probabilities support the Dollar. He notes that past Japanese intervention relied on falling US yields, but this time yields are climbing and external conditions are more challenging. MUFG expects further intervention and a more hawkish BoJ tone, yet doubts this will significantly lift JPY.

Intervention pressure and BoJ hawkish tilt

"Since the start of last week, the 10-year UST bond yield has jumped 30bps as investors reassess inflation risks and the potential scale of Fed response. Over that period the implied probability of a 25bp rate hike by year-end has gone from zero to around 80%. The US dollar is responding and the DXY index is 1.5% stronger – the biggest move since the initial period following the start of the US-Iran conflict. There is scope for yields to move further higher."

"In previous interventions that happened – in 2022 and July 2024 US yields fell notably in the weeks following intervention and USD/JPY fell sharply. In April/May 2024 that didn’t happen and yields remained stable at elevated levels and intervention failed. This time, the external backdrop is even more challenging – US yields are rising sharply and in these circumstances the need for additional intervention is increasing by the day."

"The BoJ is likely coming under increased US pressure to hike rates, and we suspect Ueda’s tone is set to turn hawkish ahead of the next BoJ meeting on 16th June. Yesterday he stated that “the pace of businesses passing on their costs is somewhat fast”. More comments like that and expectations of a June hike will increase further."

"But the pricing for a hike is already showing an 80% probability, so it’s unlikely that a more hawkish BoJ at this stage will be enough to lift the yen. Signals of more hiking to do beyond June would help but that seems unlikely and hence developments in the Middle East, energy markets and US yields will remain key. Additional intervention looks like it may be needed even with the BoJ turning more hawkish."

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