Takaichi's Interest Rate Preference Triggers JPY Weakness

Rabobank's Jane Foley analyzes the current state of the Japanese Yen (JPY) and its relationship to monetary policy. According to Foley, Prime Minister Sanae Takaichi has expressed a preference for low interest rates, which has put pressure on the Bank of Japan (BoJ). This has led to speculation that the government is leaning on the BoJ not to raise rates.

The US Treasury joined in with a round of concerted intervention in support of the JPY in late July. Foley notes that it's not just US treasury yields rising, but also Japanese Government Bond (JGB) yields have been increasing due to supply and inflation concerns.

Foley argues that there are good reasons for the BoJ to raise rates again, citing tight labour market conditions and a resilient economy combined with elevated oil prices and a weak JPY. The presence of these factors increases the risk of second-order price effects in Japan.

In light of this analysis, Foley suggests that USD/JPY could trade in the 157-158 area over the next 3-6 months if the BoJ raises rates again and there is renewed intervention in support of the JPY.