Commerzbank’s Volkmar Baur notes that despite higher energy prices, the Japanese Yen has only modestly weakened versus the Dollar and even gained slightly against the Euro. With USD/JPY approaching 160, markets focus on this week’s Bank of Japan meeting, April hike odds and potential government intervention. Commerzbank still expects a stronger Yen medium term but highlights near-term volatility.

BoJ, politics and budget fuel swings

"One might think that the Japanese yen should be under particular pressure due to developments in the energy market. However, the trends of the last two weeks suggest otherwise. Whilst the USD/JPY is moving rapidly towards 160, it must also be said that we were not all that far off that level to begin with. In percentage terms, the JPY has lost just over 2% against the US dollar since the start of the month and has even gained slightly against the euro."

"This is quite surprising, given that oil and gas imports account for almost 3% of Japan’s GDP. And that was last year, when energy prices were low. In 2022, imports accounted for around 4% of Japan’s GDP. Should the conflict drag on, this is likely to weigh even more heavily on the JPY."

"However, volatility could come into play this week regardless. Firstly, the Bank of Japan is meeting on Thursday for its second monetary policy meeting of the year. Whilst it is widely expected (and we agree) that interest rates will remain unchanged, the market is currently pricing in a roughly 70% chance of a hike in April. A clear verbal commitment could reinforce this assessment and also bolster the JPY. It would be more typical of the BoJ, however, to remain significantly more circumspect. The market could therefore become somewhat doubtful next week, which would weigh on the JPY."

"It is therefore quite possible that the market will test the 160 level on USD/JPY this week. And it will be interesting to see whether the government intervenes again in this scenario. In the medium term, we still expect a stronger JPY. For the time being, however, we are clearly still in the phase of heightened volatility that we anticipated."

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