Strategists back Japanese Yen strength despite its slide towards 160.00

The Japanese Yen (JPY) is displaying early signs of a structural recovery over the medium term, underpinned by Japan’s resilient economy as attention turns to Bank of Japan (BoJ) policy normalisation and increased currency intervention risks around the 160.00 level. Following the release of US Consumer Price Index (CPI) inflation figures, USD/JPY briefly moved back towards the key resistance zone at 159.00–160.00. Nevertheless, robust Japanese manufacturing sentiment, sustained wage growth and growing demand for Japanese Government Bonds (JGBs) are strengthening confidence that BoJ interest rates are moving towards neutral. Strategists at ING and MUFG see near-term US Dollar (USD) strength testing the upside for USD/JPY, but argue that higher domestic yields and the threat of official intervention are making the Yen increasingly appealing at prevailing levels.

Stronger Japanese data and stable 2% inflation set the stage for BoJ tightening, ING says

Solid corporate earnings, wage increases and AI-led demand for data centres are supporting an improvement in manufacturing sentiment, according to Chris Turner at ING. These developments are reinforcing the Bank of Japan’s assessment that inflation is sustainably anchored at 2.00%. Turner expects broad US Dollar strength could briefly bring technical resistance at 159.00 into play, but believes a rise above 160.00 would draw aggressive buying from investors seeking cheap Yen.

"All of the above can feed into the Bank of Japan's view that inflation is now stable at 2.00% and its accommodative monetary policy can be reined in... The broadly strong dollar means that USD/JPY could easily push through resistance at 159, but we increasingly think investors will be looking to acquire cheap yen should USD/JPY push above 160 again."

JGB inflows and BoJ’s approach to neutral support medium-term Yen gains, MUFG says

Despite US inflation data sending USD/JPY back towards 160.00, Derek Halpenny at MUFG argues that the prospect of official intervention and better JGB market sentiment leave medium-term risks tilted firmly towards Yen appreciation. He sees strong grounds for a lasting Yen recovery as the BoJ approaches its neutral rate and potential tax incentives emerge to promote domestic bond purchases.

"The yen weakened sharply yesterday in response to the US inflation data and USD/JPY has returned closer to the 160-level, above which intervention becomes a much greater prospect... There continue to be 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... There is also growing speculation that the government will soon make changes to incentivise JGB buying by including individual JGB holdings in tax-free NISA accounts and/or removing these holdings from inheritance tax... With intervention likely halting the prospects to the upside, and confidence in the BoJ improving, the risks certainly look more skewed to yen strength over the medium term."

Domestic support builds for a Yen recovery

Domestic monetary policy normalisation and stronger JGB demand are starting to offset external yield pressures, bringing the Japanese Yen close to a significant turning point. ING cautions that near-term USD momentum could take USD/JPY towards 159.00. However, both ING and MUFG see scope for a medium-term Yen recovery, supported by the threat of official intervention above 160.00 and a Bank of Japan that is within 1–2 rate hikes of its neutral rate.

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