In a recent report by MUFG, Derek Halpenny discusses the rising intervention risks in Japan's financial markets due to the ongoing sell-off in Japanese Government Bonds (JGBs). The report highlights concerns regarding the Japanese Yen's (JPY) weakness and its potential impact on market stability, particularly in light of the Bank of Japan's (BoJ) recent rate hike.

Intervention risks rise amid JGB sell-off

"The big move in Japan’s financial markets today was in the JGB market rather than the Yen with the 10-year JGB yield hitting a high of 2.10% before retracing modestly but still up 6bps from Friday’s close and the highest since 1999."

"The FX reaction on Friday to the BoJ’s decision to hike rates by 25bps to 0.75% clearly illustrated fears over the overly-cautious approach to raising rates in circumstances of still high inflation and additional fiscal stimulus set to support the economy in H1 next year."

"Financial market instability is the greatest risk to the Takaichi government, especially a sustained bout of Yen weakness given this would be most likely to hit the approval rating of the government, which remains high following the leadership election of Takaichi."

"What investors want to see is an acknowledgement from the government that they are aware of these risks and hence will act more cautiously on fiscal policy."

"Given these current risks and uncertainties, FX intervention is very unlikely to succeed without that indication from the government on managing fiscal policy risks appropriately. If that isn’t revealed in Friday’s budget announcement, JGB selling could extend along with another lurch lower for the Yen.",