G10 FX Weekly: MoF Must Act on USD/JPY as Talk Is Cheap (and Ineffective)

Summary

• The Japanese Ministry of Finance (MoF) has continued verbal intervention, warning the market it is unhappy with USD/JPY price action and is prepared to push back against the JPY selloff.
• USD/JPY has continued rallying this week, breaking 154 for the first time in 34 years.
• The US Dollar Index (DXY) has had its strongest week since 2022, as the USD has rallied strongly against all major peers.

Market Implications

• The MoF must act soon, otherwise the USD/JPY rally will reach levels that increase pressure on the Japanese authorities.
• We identify ~156 as a level likely to trigger MoF buying of JPY.

USD Is on a Tear

successive strong US data prints have led to the strongest weekly rally in the DXY since 2022, taking it to a new year-to-date (YTD) high this week.

Chart 1: US Dollar Index (DXY) Spot Price

One of the most attention-grabbing pairs in the broad USD rally has been USD/JPY, which has printed above 154 for the first time since 1990.

Chart 2: Orange Line = USD/JPY Spot Price

This multi-decade move is also eye-catching because of the rally’s pace.

Since breaking 152 last week, which is an important level given the MoF’s intervention there in 2022, USD/JPY has quickly gathered upward momentum.

Chart 3: Orange Line = USD/JPY Spot Price

MoF Is Unhappy With the USD/JPY Rally

The MoF has voiced its concern over the pace of JPY depreciation and the currency’s level several times in recent weeks.

Comments from the G-20 finance ministers’ meeting this week in Washington reiterated Japan’s stance on JPY.

Japanese finance minister Shunichi Suzuki said he was closely watching currency moves and will provide a ‘thorough response as needed’ to recent JPY weakness.

He added in a statement with South Korea’s finance minister that Japan has ‘serious concerns’ over recent JPY weakness and that the MoF could take ‘appropriate steps’ to counter the ‘excessive movements.’

Additionally, at a trilateral meeting in Washington, a joint statement between the US, Japanese, and Korean finance ministers acknowledged the ‘serious concerns’ about currency weakness in the JPY and KRW.

Japan’s top currency official, Masato Kanda, said ‘reflecting Japan’s stance, the G7 has reaffirmed its commitments to past G7 policy responses, including exchange rates.’

Kanda added, ‘the key commitment is the recognition that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability.’

Official Japanese communications this week underscored their concern about JPY weakness, opening the strong possibility of intervention.

The Market Is Pushing the MoF to Act

Despite the MoF’s concerted verbal intervention, the market is not (yet) convinced.

Instead of heeding the warnings from Japanese officials, the market is seemingly not listening and continues pushing USD/JPY higher.

The MoF’s verbal interventions have been frequent and strongly worded. Given this, and as we wrote last week, we think it is a question of when, not if, the MoF start buying JPY in the market.

The MoF’s problem is that USD strength is not restricted to USD/JPY.

So far this year, the USD is up against all its G10 counterparts (Chart 4).

Chart 4: Orange Lines = G10 Currency Spot Price vs USD YTD

And while the JPY is the weakest of the majors, it is not alone in dropping against the USD.

As a result, any MoF intervention will face broad USD strength, which is far from ideal for Japanese officials.

Conclusion: Stay on Intervention Watch

Nevertheless, we expect the MoF will start buying JPY in the market to stem the currency’s weakness.

Recently, my colleagues Ben Ford and Viresh Kanabar argued the 156 level in USD/JPY could be the key price point for MoF intervention.

Back in 2011 and 2022, the MoF waited for USD/JPY to rise another 2% from their last statement before intervening physically.

Considering last week’s strong verbal intervention when USD/JPY was trading at ~152.90, physical intervention could happen at around 156.

Therefore, we are on heightened intervention watch, analysing price action closely before initiating any exposure.

Richard Jones writes about FX and rates markets for Macro Hive. He has traded and invested in interest rate and FX market portfolios spanning three decades, both on the buy-side and sell-side.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)