Should the Japanese government order the Bank of Japan (BOJ) to intervene in FX markets, it deserves the savage USD/JPY bounce that will almost inevitably be coming its way. Because rather than trying to convince traders that yen weakness reflects hyper-speculative forces detached from fundamentals, it needs to accept its own policies, and those of the BOJ, are what’s primarily responsible for suppressing the yen.
JPY weakness a consequence of policy divergence
By attempting to reflate the Japanese economy and flip the deflationary mindset that has been in place for decades, policymakers are purposely running extremely loose settings, especially on the monetary side. Contrast that to what’s happening in the United States where the Federal Reserve is attempting to do the exact opposite, deliberately running contractionary monetary policy to lower inflation back to acceptable levels.
The chasm between what the BoJ and Fed are doing is as wide as the Mariana trench is deep, resulting in US interest rates ballooning compared to those in Japan. That’s why investors are flocking to the USD and away from the JPY, especially when the US appears to be defying the economic slowdown seen elsewhere.
FX intervention may not work
Until that trend changes, or the BOJ abandons its ultra-easy policies, it’s why intervening in the FX market will be ineffectual beyond the immediate near-term. The Japanese government will be the one generating unnecessary market volatility in trying to fight fundamentals, as the Bank of Japan are doing with Japanese bond market by artificially suppressing yields. Across every tenor this week yield differentials between US and Japanese bonds blew out to the fresh highs. Is it any surprise USD/JPY rose to levels seen last year when the BOJ last intervened? Absolutely not.
But the threat of intervention has turned USD/JPY into a stalemate. The fundamental bias remains higher but few are willing to push it meaningfully so given constant warnings from Japanese officials, especially when US Treasury Secretary Janet Yellen seemed sympathetic to the idea this week.
USD/JPY: play the stalemate range
From a tactical perspective, this stalemate points to sideways range trading for the foreseeable future. USDJPY has found support recently around 145.00, so buying dips ahead of that with a stop below could work when USD/JPY approaches the bottom of the range. At the top of the range, everyone seems to think the BOJ’s line in the sand for intervention is 150, so rallies towards that figure with a stop above may suit those looking for downside.