Japanese Yen: Policy doubts weigh on Yen – BNY

BNY's Geoff Yu highlights that recent weak Japanese GDP data and rising Japanese Government Bond (JGB) yields are causing doubts about the Bank of Japan's (BoJ) ability to maintain a stronger Yen. USD/JPY is currently trading above 159.00, having shed gains from the central bank's intervention. Persistent outflows of JPY can be observed in the iFlow data, although selling has recently diminished as positioning turns underheld once again.

However, Japan's Q2 preliminary GDP data again casts a shadow on the BoJ's capacity to hike interest rates, even though markets view such a move as essential for the Japanese authorities to have any chance of success in defending the Yen. The overnight weakness in the JGB market also indicates serious concerns about the policy credibility of the BoJ.

Based on the flow figures provided, the market continues to be skeptical of the BoJ's success and has taken advantage of the situation to sell Yen, both in aggregate and against the USD. Since July 30, the first day of the intervention, the daily average sales magnitude for JPY stands at 0.86, which is higher than the 0.79 daily average for USD/JPY on its own.

However, in the past week, selling has gradually eased, with the JPY now being underheld for the first time since the end of 2024, though current holdings levels are highly volatile.