Yen Rebound May Be Short-Lived Amid BoJ Hawkish Signals
The Japanese yen has experienced a sharp rebound against the U.S. dollar over the past two days, rising by around 3%. This move comes just over a month after Japanese authorities intervened heavily to support the currency.
However, analysts from Capital Economics suggest that this recent strengthening may be short-lived and instead point to signs of increased proactivity from the Bank of Japan (BoJ) on monetary policy as a potential driver of the yen's gains.
The absence of large, abrupt moves associated with previous interventions has led some to speculate that the Ministry of Finance may not have returned to the market. Additionally, there is no evidence of fresh intervention, and expectations for tighter BoJ policy appear to be playing a more significant role in the currency's price action.
Recent hawkish signals from policymakers have strengthened expectations for a rate increase at the September meeting, with money markets now pricing a greater than 50% chance that the central bank will deliver two 25-basis-point hikes by year-end. Reports of potential changes to the Government Pension Investment Fund's (GPIF) portfolio also support the currency.
While tighter BoJ policy and GPIF portfolio changes may provide stronger support for the yen, concerns surrounding Japan's fiscal outlook continue to weigh on the currency. The yen remains significantly undervalued, leaving scope for a larger recovery once conditions turn more decisively in its favor.