Japanese Yen: Stronger yen driven by fundamentals – MUFG

MUFG’s Lee Hardman notes that the Japanese Yen (JPY) has strengthened sharply, pushing USD/JPY back towards the 155.00 support level that has held several times this year. Hardman highlights that this move appears fundamentally driven rather than intervention-led, with markets pricing faster Bank of Japan (BoJ) tightening and a likely rate hike this month. Speculation over GPIF reallocations and concerns about expansive fiscal policy also feature.

BoJ tightening expectations support yen

"The yen has strengthened sharply over the couple of trading days resulting in USD/JPY falling back towards the 155.00-level. It has proven to be an important support level so far this year after it held following intervention driven yen gains in late April/early May and in late July/early August. On this occasion the sharp strengthening of the yen appears to have been driven by fundamental drivers rather than intervention which increases the likelihood of a more sustained rebound."

"Furthermore, hawkish comments from BoJ officials including Governor Ueda at the start of this week have signalled that a rate hike is likely this month."

"A view backed up by a Bloomberg report yesterday stating that the BoJ is leaning toward raising its policy rate by 25bps this month in response to upward price risks, while leaving open the possibility of accelerating the pace of hikes thereafter, according to people familiar with the matter. BoJ officials reportedly continue to see inflation risks as skewed to the upside, with service prices and ongoing weakness in the yen strengthening the case for action. However, the report did dampen more extreme speculation over the possibility of even a larger 50bps “jumbo hike”."

"There are almost 50bps of cumulative hikes priced in by year-end and just over 75bps of hikes by the middle of next year. A slightly faster pace of hikes than our own forecasts for a further 75bps of hikes."

"At the same time, the yen has derived some support as well by renewed speculation over the potential for the GPIF to shift their asset allocation towards domestic assets which would help to ease capital outflows into overseas markets that have been weighing on the yen."

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