MUFG’s Senior Currency Analyst Lloyd Chan notes that USD/JPY faces ongoing two-way volatility as markets gauge Japanese government tolerance for BOJ policy normalization. Local media suggest PM Takaichi is wary of further rate hikes, which may limit BOJ tightening. Reported US Treasury rate checks near 158.00–159.00 highlight sensitivity to a weaker Japanese Yen and leave USD/JPY prone to sharp pullbacks.

Volatility persists with intervention risk

"Markets appear to remain sensitive to the degree of tolerance within the Japanese government for BOJ policy normalization. Recent local media reports indicate that PM Takaichi has concerns about more rate hikes during a meeting with BOJ Governor Ueda, which could constrain the BOJ’s rate tightening path. This has led to another bout of yen weakness yesterday."

"There is likely continued two-way volatility for USDJPY. Indeed, as the yen weakens, there is a risk of FX intervention that could help contain the pace of currency depreciation. Notably, the US Treasury has also reportedly conducted a rate check on USDJPY in January, when the pair was trading around the 158.00–159.00 area, underscoring heightened sensitivity to a sharply weaker yen."

"This backdrop leaves USDJPY vulnerable to sharper pullbacks, as we have seen in the days after the rate check. Recent yen softness has provided a marginal lift to the US dollar index (DXY), although the USD continues to struggle to convincingly re-establish its medium-term uptrend. Ongoing yen depreciation has kept policy normalization expectations alive, with markets pricing roughly a 56% probability of a BOJ rate hike in April, with a move fully priced by July."

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