Japan's Intervention Stalls USD/JPY Below Pre-July Levels Amid BoJ Policy Risks

Rabobank's Senior FX Strategist Jane Foley recently assessed Japan's foreign exchange intervention and its impact on USD/JPY. The results show that, as of now, USD/JPY is approximately 3% below pre-July levels, allowing the Ministry of Finance (MoF) to claim some success in their efforts. However, Foley emphasizes that Japan's fundamentals and Bank of Japan (BoJ) policy remain crucial factors.

Foley notes that even though the consensus in the Bloomberg survey does not predict a return to USD/JPY levels above 160 this year, most forecasters would likely agree that it is still possible. The government has indicated its support for tighter monetary policy, but for the Japanese Yen (JPY) to strengthen further, the market will need clear evidence of a more proactive stance from the BoJ, as well as reassurances about JGB supply.

The longer USD/JPY can hold below 160, the more the MoF will be able to project the impression that the intervention has been successful. A key challenge for the MoF will be how the JPY reacts to the BoJ's upcoming September 18 policy meeting, during which market expectations of a 25-bps rate hike have increased. This suggests the JPY could be vulnerable on a steady policy outcome.

In our view, fear of further FX intervention in support of the JPY coupled with the prospect of a BoJ September rate hike and the softer USD suggests scope for USD/JPY to trade in the 158-157 area over a 3-to-6-month horizon.