MUFG’s Derek Halpenny highlights that USD/JPY is grinding higher toward the 160 level as geopolitical tensions and a prolonged Strait of Hormuz blockade fuel inflation risks. He warns that a dovish Bank of Japan (BoJ) stance next week could spur further Yen selling, with deeply negative real rates and past, short‑lived interventions reinforcing a fundamentally weak Japanese Yen (JPY) backdrop.

BoJ tone and MoF resolve in focus

"There are a host of central bank meetings next week and no rate hikes are expected from the big four central banks but that could well change by the time of the next round of meetings in June. The BoJ will meet on Tuesday and is expected to leave its policy stance unchanged."

"But there is a danger that the tone of communication by the BoJ next week fuels a renewed bout of yen selling that sees USD/JPY break more notably above the 160-level that in turn tests the resolve of the MoF to curtail yen selling. Finance Minister Katayama spoke today at an event in Tokyo and made clear that the MoF is ready and very focused on taking “bold action” against speculative moves. Katayama was also very keen to convey the message that Japan and the US are in very close contact “24 hours a day” and that Japan had a “free hand” on taking action."

"The tone of Governor Ueda’s comments at the press conference following the meeting on Tuesday will be key for yen moves. There is an impression that the government want policy kept loose but the rising inflation risks will see that stance increasingly questioned by the markets. A hawkish tone we believe is important given there is about 18bps of tightening priced for the following meeting in June."

"The real policy rate remains deeply negative and that will likely encourage yen selling despite the threat of intervention."

"A BoJ that remains sidelined as inflation moves higher will be another signal that the fundamental backdrop hasn’t changed."

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