Intervention from the Bank of Japan has so far done nothing to stop the slide in the Japanese yen this year. Will the central bankers try to intervene again or must they finally pivot to rate hikes?
The Yen has seen record losses across the G10 FX group with both USD and CHF at their highest level against JPY since the early 80’s. In other places, such as against GBP, the volatility has been more two-way.
Now into the final quarter of the year and starting to look ahead to Q1 2023, traders are asking whether the record weakness in JPY looks set to continue further or whether we’re going to see a rebound in the coming months.
Factors Affecting JPY
- Continued BOJ easing VS G10 central bank tightening
- US Dollar
- Risk Flows
- BOJ intervention
Continued BOJ easing VS G10 central bank tightening
The main driver of the downside in JPY this year has been the stark monetary divergence between the BOJ and other G10 central banks. While surging inflation has led other G10 central banks to embark on reversing the huge stimulus programs put in place across the pandemic, the BOJ opted to keep its accommodative monetary policy in place.
With Japanese rates still negative while other G10 rates are soaring back into 2 and 3% territory, JPY has seen huge capital outflows as traders seek better yield elsewhere.
Over the summer, inflation was refusing to cool and central banks such as the Fed and the BOE continued to hike. Even the ECB hiked rates in July for the first time since the GFC, yet the BOJ continued to reaffirm its commitment to tightening monetary policy. With the BOJ doubling down on its easing stance, capital outflows intensified, particularly against USD and CHF which have both traded to their highest levels since the 80s.
The sharp uptrend in the US dollar this year has been a definitive driver of JPY weakness. With USD surging higher amid haven flows and demand for high-quality collateral over the year versus all major currencies irrespective of monetary policy, the divergence between the Fed and the BOJ has added to the upward pressure on USDJPY.
In addition, as a result of the SNB making the shift away from negative rates for the first time since the GFC. The CHF has become the haven currency of choice, alongside the USD, diverting flows away from JPY in the process.
Typically, JPY appreciates during times of adverse risk sentiment. Tumbling stock and commodities prices tend to drive safe-haven demand towards JPY. However, while the S&P has fallen around 20% in recent months, USD has appreciated almost 15% against the Yen, highlighting a shift in narrative. Similarly, CHFJPY has rallied around 10% from the recent August lows. This new dynamic suggests that traders now fear the BOJ has lost control of the economy and, particularly with yields rising in the US and elsewhere, traders are turning away from JPY as a safe haven.
The ongoing slide in JPY has recently ‘crossed red lines’ for the BOJ. With record depreciation underway against several key trading partners, the BOJ was forced to intervene in currency markets for the first time since 1998. The BOJ sold a massive amount of USD in order to help stem the decline of the Yen causing a 500 pips daily swing in USDJPY and similar moves elsewhere in other JPY pairs. However, the correction proved short-lived and JPY has since gone on to depreciate further leading to fresh speculation that the BOJ will intervene on a bigger scale.
Which scenarios might unfold going forward and how will they likely impact JPY?
The biggest issue currently is the threat of further BOJ intervention. With USDJPY having passed the 150 mark for the first time since 1990 and with Japanese authorities declaring that they won’t tolerate such one-sided action.
The extent to which the BOJ can meaningfully (sustainably) drive JPY higher via FX intervention looks highly limited while the BOJ maintains its ultra-loose monetary policy. Given that there is such a large institutional short position in JPY (around $7 billion), the market seems unphased by the prospect of short-term blips. Consequently, JPY looks vulnerable to further downside going forward unless we see a shift in BOJ monetary policy and a surprise rate hike which would likely fuel a sharp covering of JPY shorts.
USDJPY Monthly Chart
Source: FlowBank / TradingView
Looking at the monthly chart has become the easiest viewpoint given the ferocity of the moves seen since the start of the year. Price is now testing the 150 area, a midpoint between two key levels at 147.60 and 152. The current move is very well developed and some correction in the near term is to be expected. However, longer-run, while the price holds above the 134.75 support, the view remains in favour of a further push higher towards 160.