MUFG’s Derek Halpenny notes that stronger Tankan data support the June BoJ rate hike and could justify faster tightening ahead, but markets still price only limited moves. He highlights rising inflation risks from further Yen depreciation and reduced intervention rhetoric from Japanese authorities, suggesting USD/JPY could continue a controlled grind higher as long as volatility and JGB markets stay stable.

BoJ tightening case versus MoF caution

"The quarterly Tankan report, released from the BoJ today was stronger than expected and certainly endorses the rate hike by the BoJ in June and strengthens the case for further hikes going forward."

"That remains a low-priced scenario in the markets with OIS pricing indicating just 6bps of tightening priced for September but close to a full hike by December."

"However, the danger is that this curtailed yen selling versus the dollar relative to the rest of G10 does not continue. The MoF rhetoric on intervention has subsided – indeed Mimura today did not mention the threat of intervention in his interview and if market participants sense a shift in strategy, the scale of yen selling could pick up quickly."

"With USD/JPY volatility still relatively low (1-month implied between 6-7%, the lowest since before Russia’s invasion of Ukraine), the JGB market relatively stable for now and equities at record highs, allowing a slow grind higher could well be the MoF strategy for now."

"There is always a risk in low-liquid market conditions on Friday when the US is on vacation that you could see intervention especially if the pace of yen selling was to pick up. The current pace of yen selling appears acceptable and if maintained could see the MoF remain on the sidelines."

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