Japanese Yen steadies a few pips short of 160.00 amid mounting intervention risks

• Following a gain of about 1.25% over the previous two days, USD/JPY pauses near 159.80 on Thursday.
• The US Dollar has strengthened broadly as speculation grows over a further Fed rate increase in December.
• Strong Japanese producer inflation readings have been counterbalanced by dovish remarks from the BoJ’s Asada.

After losing nearly 1.25% over the previous two days, the Japanese Yen (JPY) is virtually unchanged against the US Dollar (USD) on Thursday. The sell-off reflected mounting pressure from the widening monetary policy gap between the Federal Reserve (Fed) and the Bank of Japan (BoJ). USD/JPY has paused around 159.80, with 160.00 regarded as a key milestone for the authorities in Tokyo.

Strong US consumer inflation figures earlier this week, together with a succession of hawkish remarks from Fed officials advocating another interest rate increase in December, have prompted investors to increase their long US Dollar positions. 

According to the CME’s FedWatch Tool, futures markets fully price in additional Fed tightening following the US central bank’s meeting on 9 December, including a nearly 10% probability of a half-point rate increase. A host of Fed officials are due to speak later on Thursday, offering a clearer indication of the bank’s near-term intentions.

Dovish BoJ remarks weaken expectations for a December rate rise

Japan presents a stark contrast, particularly following a warning from BoJ policymaker Toichiro Asada that higher borrowing costs might restrain growth and underlying inflation. Asada was one of the two dovish dissenters at September’s meeting. His remarks have called into question market expectations for another rate increase at the next meeting on 17 December, putting further pressure on the Japanese Yen.

Earlier Japanese data offered support, however, with producer inflation strengthening the case for the BoJ’s hawks. Annual growth in the Producer Price Index (PPI) accelerated to 7.1% in October from 6.8% in September, exceeding expectations of 6.5%.

Nevertheless, MUFG analysts believe the Yen is finding support from “signs that confidence in the JGB market has improved, no doubt helped by the more active BoJ and the general consensus that within one or two hikes, the BoJ would be at the neutral policy rate.” Against that backdrop, and with “intervention likely halting the prospects to the upside, and confidence in the BoJ improving,” the bank’s experts judge that “the risks certainly look more skewed to Yen strength over the medium term.”