JPY: Intervention alert, or a BOJ alert?

Japanese yen has been on intervention alert for some weeks as USDJPY rose above the key 152 level on April 10 and breached 154 on April 15. The resilience in the US economy, sticky inflation and a pushback from Fed members saw US yields rushing to fresh highs, and that weighed on the yen.

However, only verbal intervention came through from Japanese authorities. This made complete sense because an actual intervention could have been futile in the rising US yield environment. While a knee-jerk reaction could have brought USDJPY back towards 150, the wide and increasing yield differential between the US and Japan could have reversed that move quickly.

But there is reason to believe that intervention threat has stepped up now and officials may be looking to defend the 155 handle, because:

1. Hawkish Fed repricing could be close to an end for now

   The strong US economic data and the pushback from Fed members on rate cut expectations have largely been priced in by the markets. Market now expects the first full rate cut from the Fed only in November and less than two rate cuts this year. There may have been some hesitancy to fight the strong dollar move as it was playing out in the last few days, but that seems to be nearing a peak for now.

    

2. Other Asian currencies have come under pressure as well

   While JPY is down 1.7% against the USD month-to-date, the Korean won (KRW) and Indonesian rupiah (IDR) are down 1.9% each. The Indian rupee (INR) fell to a record low on Wednesday. The strong US dollar has been a headwind for Asian currencies, and this has led to a coordinated effort from Japanese and Korean finance chiefs to discuss this with the US in a trilateral meeting.

    

3. G7 comments suggest international coordination may be likely

   With the G7 meetings ongoing in Washington, there were reports that US Treasury Secretary Janet Yellen took note of worries from Japanese and Korean officials on FX. While room for a coordinated intervention may still be small, these comments suggest that US authorities may be tolerant of an intervention if one was to come from Japan (or Korea) and risk of getting tagged as a currency manipulator has been addressed.

    

4. BOJ meeting next week

   The next Bank of Japan meeting is scheduled for April 26, and Governor Ueda has said that yen’s impact on inflation expectations will be a key factor. A weak yen pushes up the cost of energy imports. This could mean another surprise rate hike by the BOJ, or at the very least, a hawkish stance to guide for another rate hike. This could make an intervention response more likely to stick.

While the stepped-up warnings may again be about buying time, there seem to be clear indications that Japanese authorities will try to defend the 155 handle in USDJPY. Any yen intervention could bring USDJPY to test 150. Such a move could also pause the rally in Japanese equities.