MUFG’s Derek Halpenny notes that the USD/JPY currency pair is steadily rising toward the 160 level, driven by ongoing geopolitical tensions and a prolonged blockade of the Strait of Hormuz, which are contributing to increased inflation risks [1]. Halpenny warns that the Bank of Japan (BoJ) is expected to maintain its current policy stance at its upcoming meeting on Tuesday, but a dovish tone in its communication could trigger further selling of the Japanese Yen (JPY), potentially pushing USD/JPY more decisively above 160 [1].
Finance Minister Katayama emphasized at a Tokyo event that the Ministry of Finance (MoF) is prepared to take 'bold action' against speculative moves in the currency market and highlighted that Japan and the US are in close contact '24 hours a day.' Katayama also stated that Japan has a 'free hand' in taking action to address yen volatility [1].
Halpenny points out that the tone of BoJ Governor Ueda’s comments following the meeting will be crucial for yen movements. While the government appears to favor maintaining loose policy, rising inflation risks are likely to increase market scrutiny of this stance. Markets have priced in approximately 18 basis points of tightening for the BoJ’s following meeting in June, indicating expectations for potential policy shifts [1].
Despite the threat of intervention, the real policy rate in Japan remains deeply negative, which is expected to continue encouraging yen selling. Halpenny concludes that if the BoJ remains on the sidelines as inflation rises, it will signal to markets that the fundamental backdrop for the yen has not changed [1].
CONCLUSION
The BoJ’s expected dovish stance and deeply negative real rates are fueling concerns of further yen weakness, especially as USD/JPY approaches the 160 level. Market participants are closely watching for any shift in tone from BoJ Governor Ueda and potential intervention by the MoF, but for now, the fundamental outlook for the yen remains bearish.