Tokyo risks throwing another tens of billions of dollars down the drain. After the currency intervention failed earlier this year, there is a growing risk that this summer’s Forex intervention will prove equally ineffective. Let’s examine the situation and develop a trading plan for the USD/JPY pair.
The article covers the following subjects:
Major Takeaways
- Hedge funds are selling the yen again.
- Currency interventions do not change the fundamentals.
- The Bank of Japan is poised to raise rates.
- Long positions can be considered if the USD/JPY pair rises above 160.2.
Weekly Fundamental Forecast for Yen
Currency interventions can correct imbalances in market positioning, but they cannot tackle underlying fundamental issues. Japan spent a record $96.4 billion in a single month to support the yen, but the move only temporarily dampened speculative demand for the USD/JPY. Hedge funds have gradually recovered from their losses at the turn of July and August and have been rebuilding long positions in the pair over the past two weeks. It appears the government may have thrown money down the drain once again.
Speculative Positions on Japanese Yen
Source: Bloomberg.
The wide interest-rate differential between the central banks, the mismatch between Tokyo’s fiscal and monetary policies, and rising oil prices—which are a drag on the Japanese economy—cannot be addressed through currency intervention alone. Scott Bessent understands this well and has hinted that the BoJ may need to raise its policy rate as early as its next meeting.
The US Treasury Secretary expects Kazuo Ueda to assess the situation correctly. Abenomics has effectively run its course, essentially a reflationary policy program. Meanwhile, inflation in Japan has resumed its upward trend despite the government’s efforts to contain it. In August, Tokyo’s consumer price inflation accelerated from 1.7% to 1.8%. As a result, the probability of a BoJ rate hike in September has jumped to 84%.
Tokyo CPI
Source: Bloomberg.
Scott Bessent’s position is understandable. In a briefing note to Congress on US participation in coordinated currency interventions, he noted that Japan is the largest foreign holder of US Treasuries. As a result, sharp swings in the yen could also negatively affect the US Treasury market. However, the Treasury Secretary’s view that a decline in the USD/JPY requires the BoJ to tighten monetary policy is only part of the story. The Fed’s policy stance also matters.
Unfortunately, Kevin Warsh’s hawkish rhetoric at Jackson Hole opened Pandora’s box. The derivatives market has raised the odds of a Fed rate hike in September to 66%, while the probability of two rate hikes in 2026 has climbed to 50%. Against this backdrop, USD/JPY bears face an uphill battle.
10-Year Japanese Government Bond Yield
Source: Bloomberg.
The yen’s best hope may lie in a shift in the investment stance of Japan’s Government Pension Investment Fund (GPIF). The government has previously urged the fund to increase its allocation to domestic assets, but GPIF has stressed that its investment decisions will be guided by its beneficiaries’ interests. Nevertheless, the rise in 10-year Japanese government bond yields above 3%—their highest level since 1996—is making domestic assets more attractive and could encourage capital repatriation to Japan as GPIF rebalances its portfolio.
Weekly USDJPY Trading Plan
The second attempt to break through 159.5 was more successful than the first. If the USD/JPY rises above 160.2, long positions can be increased.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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