Japanese Yen: Intervention impact assessed – Rabobank

Rabobank's Senior FX Strategist Jane Foley evaluates Japan's foreign exchange intervention and its effects on USD/JPY. She observes that USD/JPY is approximately 3% lower than its pre-July levels, which allows the Ministry of Finance to suggest some degree of success. However, she emphasizes that Japan's economic fundamentals and the Bank of Japan's policy are still important factors.

Foley predicts a possible trading range of 158-157 for USD/JPY over a 3-6 month period. The fact that USD/JPY remains beneath its pre-intervention levels might allow the Ministry of Finance to claim the success of their cooperation with the US Treasury. Yet, given the complexity of factors influencing foreign exchange markets, it may only become evident in hindsight whether Japan's economic fundamentals have sufficiently evolved to warrant a stronger currency.

Presently, Japan's currency is not out of danger. Even though the Bloomberg survey consensus does not anticipate a return to the USD/JPY 160 level this year, most analysts would likely acknowledge that a move to such a level should not be dismissed. The government has now signaled its support for tighter monetary policy, but for the JPY to strengthen, the market will probably require clear indications of a more proactive stance from the Bank of Japan, along with assurances regarding Japanese government bond supply.

Fiscal issues are expected to persist until the 2027 budget negotiations commence in the latter part of the year, and possibly beyond. The longer USD/JPY remains below 160, the more the Ministry of Finance can project the impression that the intervention was successful. A major challenge for the Ministry of Finance will be how the JPY reacts to the Bank of Japan's September 18 policy meeting.

Anticipation of a 25-basis point rate increase has grown, suggesting that the JPY could be susceptible to a steady policy outcome. If the Bank of Japan does raise rates, the Ministry of Finance may replicate its July strategy of intensifying market movements through additional intervention. In our assessment, concerns about further foreign exchange intervention to support the JPY, combined with the possibility of a Bank of Japan September rate hike and weakened USD, suggest potential trading of USD/JPY in the 158-157 range over the next 3-6 months.