USD/JPY stabilized after rallying to an 8-month high near 153.27. Japan’s ruling coalition fell apart today after Komeito, the junior partner to Sanae Takaichi’s Liberal Democratic Party, indicated it planned to pull out of the partnership. The loss of Komeito support mean Takaichi will face significant constraints to push ahead with her fiscally profligate pledges, BBH FX analysts report.

USD/JPY rally outpaces previous BOJ FX interventions

"Moreover, Japan’s Finance Minister Katsunobu Kato warned against 'one-sided and rapid movements' in the yen and reiterated 'The government will carefully assess any excessive or disorderly movements in the market.' The comment suggests USD/JPY is nearing levels that could trigger official intervention, under 155.00."

"USD/JPY is up 4.6% in 10 days, which puts it ahead of the pace seen in the last two Bank of Japan (BOJ) FX interventions. The BOJ bought ¥9.79 trillion from April 26, 2024 through May 29, 2024 after USD/JPY rallied by 5.7% in 20 days. And, the BOJ bought ¥5.53 trillion from June 27, 2024 through July 29, 2024 after USD/JPY rallied by 4.2% in 30 days."

"Meanwhile, the growing disconnect between USD/JPY and US-Japan bond yields spreads points to heightened risk of a sharp USD/JPY pullback. Bottom line: we recommend investors short USD/JPY at current levels (152.90) with a stop loss at 154.00 and an initial target of 148.00."