Rabobank’s Senior FX Strategist Jane Foley discusses the Japanese Yen (JPY), noting that expected endorsement from the United States (US) Treasury for recent Ministry of Finance (MoF) FX intervention should support the currency in the near term. However, Foley argues USD/JPY will only convincingly move lower if Japan’s fundamentals strengthen further and the Bank of Japan (BoJ) continues tightening policy, alongside a dovish Federal Reserve (Fed) outlook.

Yen support hinges on policy trajectory

"The visit of US Treasury Secretary Bessent to Japan this week is widely expected to bring an endorsement of the MoF’s recent FX intervention."

"Confirmation that the US Treasury has supported the recent steps taken by the MOF to support the JPY would likely keep it underpinned in the near-term."

"Further out, however, the market will need greater reassurance regarding a strengthening in Japan’s fundamentals for USD/JPY to convincingly turn lower. This would almost certainly include a continued tightening of monetary policy in Japan."

"In any case the market already sees a strong chance that the BoJ will hike rates again in June, after three policy makers dissented in favour of higher rates at the April policy meeting."

"Expectations that the US Treasury will endorse the MoF’s recent FX intervention in favour of the JPY is likely to offer support to the currency near-term. In addition, Reuters has reported that the MoF has spent a relatively moderate JPY10 trn in its recent intervention activity. This may worry JPY bears that the government has more up its sleeve."

"That said, if expectations regarding the potential for further BoJ rate hikes starts to waiver, the JPY could again be exposed. Our forecast of a move to USD/JPY 152 on a 6-month view assumes the BoJ’s rate hiking cycle continues. It also assumes a dovish Fed."

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