Experts agree: Japanese Yen needs more than intervention to take off from lows

The Japanese Yen (JPY) continues to face losses against the US Dollar (USD) in a quiet trading session on Monday. Despite bouncing from lows near 158.00 last week, the USD/JPY has approached the crucial 160.00 level, indicating that mere intervention threats are insufficient to propel a substantial Yen recovery. Experts from Societe Generale suggest that a more sustainable Yen rally hinges not on rate differentials, but rather on the domestic growth narrative.

They believe that an upgrade in Japanese economic forecasts could be the catalyst needed to kick-start a sustainable yen rally, rather than merely focusing on differentials. While the consensus anticipates an average growth rate of 0.75% for this year and the following year, which is an improvement from recent months, experts caution that this figure remains notably lower than pre-Gulf conflict levels.

This underscores the necessity for a more compelling enhancement in Japan’s growth outlook before expecting a consistent Yen rebound. FX analysts at BNY Mellon emphasize growing apprehensions about Japan's fiscal balance, highlighting that foreign investors have accelerated JGB selling last week, resulting in net outflows of ¥1.25tn.

Consequently, YTD foreign net purchases of JGBs have dropped to ¥4.99tn, the lowest cumulative level since early February. The BNY Mellon analysts further note that overall, the flow mix indicates a similar trend for the currency, with foreign selling of Japanese bonds and increased Japanese buying of foreign assets weakening support for the JPY, thereby making it susceptible to further depreciation.

UOB Group strategists maintain a cautiously negative stance on USD/JPY but dismiss the prospect of a significant Yen recovery in the near term. They observe that downward momentum is emerging, yet it is inadequate for a sustained decline. They project that within the next one to three weeks, the USD might marginally decrease but should remain contained within the 156.60/159.60 range.

The bank's analysts highlight that the USD has predominantly oscillated within a range, and the growing momentum is waning, prompting them to retain their present position despite the reduced downside risk. The Japanese Yen is among the world's most actively traded currencies, with its value primarily influenced by the Japanese economy's performance, the Bank of Japan's policy stance, the disparity between Japanese and US bond yields, and trader risk sentiment.

The Bank of Japan (BoJ), responsible for currency management, occasionally intervenes in currency markets, typically to devalue the Yen, although it refrains from frequent intervention due to political concerns regarding its key trading partners. The BoJ's expansive monetary policy from 2013 to 2024 contributed to the Yen's depreciation against major currencies due to a growing policy divergence between the Bank of Japan and other major central banks.

However, the gradual reversal of this ultra-loose policy has lent some support to the Yen. During the last decade, the Bank of Japan's adherence to ultra-loose monetary policy has fostered a widening policy gap with other central banks, particularly the US Federal Reserve, which has fueled the US Dollar's appreciation against the Japanese Yen.

The Bank of Japan's 2024 decision to gradually withdraw from ultra-loose policy, coupled with interest rate cuts in major central banks, is diminishing this divergence. The Japanese Yen is also perceived as a safe-haven asset, meaning that during periods of market turbulence, investors tend to allocate more of their funds to the Japanese currency due to its perceived reliability and stability. In times of stress, the Yen's value against other currencies is likely to strengthen.