USD/JPY forecast: Japanese yen interventions could backfire

on Jun 5, 2024
  • The Japanese yen has strengthened recently because of BoJ’s interventions.
  • Recent data shows that the central bank intervened by spending $62 billion.
  • The Fed and the BoJ will deliver their next interest rates decision next week.

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The USD/JPY exchange rate rally has stalled in the past few weeks, helped by the robust Bank of Japan (BoJ) interventions. The pair, which peaked at 160.26 in May, has tumbled to about 155.56 as focus shifts to the Fed and BoJ actions.

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The Japanese yen is still at risk

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The recent Japanese yen strength happened because of the actions by the Bank of Japan, which has spent over $62 billion in currency interventions. These were the first interventions since 2022 when the currency was in a freefall.

I believe that currency interventions offer a short-term reprieve for a currency. Indeed, the Japanese yen has crashed hard since the last interventions in 2022.

Unfortunately, there is no easy solution to solve the Japanese yen crisis. While more interest rate hikes would be ideal, their implications on the economy would be dire because of the huge Japanese debt.

Japan has a total public debt of almost $10 trillion, which is significantly higher than the country’s GDP of over $4.7 trillion. Therefore, higher interest rates would lead to more debt repayment burdens for the government.

The other challenge for the Japanese yen is that the Federal Reserve has hinted that it will hold interest rates higher for longer. US inflation has remained at an elevated level, with the headline Consumer Price Index (CPI) remaining at 3.4%. 

Therefore, the spread between the US and Japan’s interest rates will remain being wide for a long time. This, in turn, will make the pair one of the most popular carry trade options in the developed world. Carry trade is a situation where investors borrow from low-interest rate countries to invest in higher rates countries.

The next two weeks will be important for the USD/JPY pair. The US will publish the latest jobs numbers on Friday. Economists expect the data to reveal that the economy added over 180k jobs while the unemployment rate remained at 3.9%.

The next crucial news will come out next week when the Fed and the BoJ delivers their interest rate decisions. The expectation is that the Fed will leave rates unchanged between 5.25% and 5.50% and maintain its higher-for-longer view. 

On the other hand, the Bank of Japan is expected to maintain interest rates unchanged and start tapering its bond purchases.

USD/JPY technical analysis

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USD/JPY chart by TradingView

The USD/JPY exchange rate has been in a tight range in the past few days. It has remained at 155.60, a few points below the year-to-date high of 160.26. The pair is consolidating at the 50-day and 25-day Exponential Moving Averages (EMA) while the Relative Strength Index (RSI) has pointed downwards.

I suspect that the pair will continue rising in the coming weeks because the impact of interventions tends to be short lived. If this happens, the initial level to watch will be the year-to-date high of 160.26. A move above that level will see it continue its bull run. 

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