USD/JPY, Yen Analysis

• FX intervention rhetoric shifts up a gear
• USD/JPY completely disregards the fall in US-Japan bond spreads to trade higher
• Markets appear to be calling the bluff of Japanese officials as each intervention level has been surpassed since 2022 interventions
• The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

Japan’s Top Currency Official Declares Recent Yen Weakness 'Not Justified'

Japan’s top currency official Masato Kanda from the Ministry of Finance (MoF) issued his sternest warning yet against undesirable, speculative moves in the FX space. However, markets appear happy to call his bluff seeing that USD / JPY has moved effortlessly beyond prior levels where intervention took place.

Kanda mentioned he is seriously concerned about the recent rapid weakness of the yen which is getting closer to the 4% gauge relied upon previously to judge a ‘rapid’ and undesirable decline in the currency. Ahead of the April FX intervention, Kanda clarified a 4% depreciation over a two-week period or a 10% decline over a month meets the definition. Since the May swing low, the yen had depreciated around 3.15% in the space of two weeks, getting close to the 4% rule of thumb.

USD/JPY traded to an intra-day high (London session) at the time of writing at around 160.81 and has breached into oversold territory on the RSI.

USD/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

USD/JPY Completely Ignores the Drop in US-Japan Bond Spreads

Recent developments in Japan have led to Japanese Government bonds rising above the 1% mark again but USD/JPY found no relief, still trading near and above 160.00. The US-Japan bond spread typically guides USD/JPY as seen below, but the pair appears to have detached from the yield differential.

The BoJ failed to provide details around a much-anticipated tapering of its bond portfolio in its last meeting where it previously spoke of reducing purchases that have kept Tokyo’s borrowing costs low. However, the BoJ stated this will be available at the July meeting at the end of next month.

In the meantime, Friday could provide insight into the Bank’s bond buying appetite when the BoJ is scheduled to release its new bond buying schedule. A combination of a reduced schedule of bond purchases combined with a potentially lower PCE figure in the US could provide a slight reprieve for USD/JPY ahead of the weekend but that appears a tough ask given the recent reluctance to halt the ascent.

Recent Disconnect Between USD/JPY and US-Japan 10Y Bond Spreads (orange)

Source: TradingView, prepared by Richard Snow

A Dangerous Game of Bluff: Markets vs the Ministry of Finance

Markets appear to be calling the Ministry of Finance’s bluff, trading comfortably above 160.00 – the most recent level that prompted officials to sell tens of millions of dollars to fund massive yen purchases. Whatever transpires, this remains a pair with excessive potential volatility that can appear with no warning – underscoring the importance of prudent risk management. Prior intervention efforts attracted moves around 500 pips.

Prior, Surpassed Instances of FX Intervention

Source: TradingView, prepared by Richard Snow