ING’s Chris Turner notes that USD/JPY has broken above its 2024 highs near 162, reaching levels last seen in the 1980s, with traders focused on potential Bank of Japan (BoJ) action. Turner highlights clustered intervention patterns, holiday timing, FX reserve constraints, International Monetary Fund (IMF) regime classification concerns, and a fundamentally driven US Dollar (USD) rally that limits how much support the Japanese Yen (JPY) can receive.

BoJ timing, reserves and IMF status

"Having sold just over $70bn in late April/early May at levels just above 160, the BoJ is widely expected to intervene again over the coming days and weeks. Japanese officials have made it clear that the weak yen poses a threat to import costs and Japan’s cost of living crisis, which has been a key topic for the electorate. Currently, those cost of living concerns are being addressed through government subsidies, which themselves bring some concern for the bond market."

"In terms of immediate timing, we suspect the BoJ might hold off ahead of possible dollar-positive event risks such as remarks tomorrow from Federal Reserve Chair Kevin Warsh and Thursday’s release of the June US jobs report. That makes Friday’s US July 4th holiday a possible window for intervention."

"A no-show from the BoJ this week would strengthen the case for holding off until 16–17 July, just ahead of Japan’s next public holiday, Marine Day on 20 July. That was the 2024 playbook. If the BoJ does wait until later in July and US data and Fedspeak remain hawkish, USD/JPY could be trading around 164–165 by then."

"FX reserves are finite resources and bouts of selling are used with care. Currently, Japan has close to $1.1trn in FX reserves. The low point this decade has been around $1.07trn, but we doubt the $1trn level represents a psychological floor."

"At the same time, we think the Japanese are taking notice of the IMF’s classification system for ‘free floating’ exchange rates and would not want to lose that status. Intervening on more than three instances over a six-month period could see Japan’s currency regime downgraded to just ‘floating’. The IMF defines an ‘instance’ of intervention as lasting no longer than three business days."

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