ING’s Francesco Pesole highlights that the risk of Japanese authorities intervening in the foreign exchange market to support the yen is currently underpriced, as USD/JPY approaches the 160.0 level [1]. Short-dated implied volatility for USD/JPY (1 week to 3 months) has declined in line with broader G10 volatility, and is not reflecting the potential for renewed intervention, despite the pair retesting significant highs [1].
Markets appear to be anticipating that the Bank of Japan’s June meeting, with a 19 basis point rate hike priced in for June 16, could help cap the USD/JPY pair [1]. However, Pesole notes that authorities may tolerate a higher intervention threshold, possibly in the 162–163 range, compared to the 160.60 level where intervention occurred in April [1]. He also points out that the largest intervention since 2004 took place in April-May, but the pace of such interventions may not be sustainable, especially given the IMF’s guideline of a maximum of three intervention episodes within any rolling six-month window to maintain 'free-floating' status [1].
Despite these constraints, Japanese authorities have maintained a hawkish stance in their intervention narrative, suggesting that the risk of further action remains [1]. Pesole expects markets to continue testing the topside in USD/JPY, particularly as June is typically a seasonally weak month for the yen [1].
CONCLUSION
The risk of renewed yen intervention is not fully reflected in current market pricing, with authorities potentially setting a higher threshold for action. Market participants should remain alert to further upside tests in USD/JPY, especially given the seasonally weak outlook for the yen and the possibility of policy responses.