The USD/JPY pair edged slightly lower after hitting a new high for April, reaching its highest level in 34 years at 154.86 on Tuesday, as the US dollar (USD) regains strength amid continued optimism about the US economy.
The pair rose despite Japanese Finance Minister Shunichi Suzuki’s warning that authorities may intervene directly to support the Japanese yen (JPY) on Tuesday.
He said the “environment” is conducive to currency intervention. Additionally, the pair is now significantly higher than the historical intervention zone, set by the Bank of Japan between 150.00 and 152.00.
US Treasury Secretary Janet Yellen met with her Japanese and South Korean counterparts last week and implicitly agreed to allow them to support their currencies if necessary. On Tuesday, a slight increase in preliminary Japanese Purchasing Managers’ Index (PMI) data for April led to a temporary slowdown in the continuous rise of the USD/JPY pair.
Investors and traders are now awaiting global Purchasing Managers’ Index (PMI) figures from the US S&P index for further insights into the progress of the US economy. A higher-than-expected outcome is expected to strengthen the US’s position regarding economic exceptionalism and support the continued upward trend of the USD/JPY pair.
It’s worth noting that the US government will sell $180 billion worth of Treasury bonds this week, issuing more debt. Also, Tuesday will see the largest-ever auction of two-year US Treasury bonds. The auctions will likely lead to higher yields on US Treasury bonds, potentially causing an upward impact on the USD against the JPY.
Meanwhile, Bank of Japan Governor Kozo Oida remains convinced that “it is appropriate to maintain accommodative monetary conditions at present as core inflation remains below 2.0%.” He warned that “if the price trend rises toward 2.0% in line with our expectations… that means raising interest rates in the short term,” according to Brown Brothers Harriman’s investment bank memo. The Bank of Japan will hold its policy meeting for April next Friday. It’s unlikely that the Bank of Japan will raise interest rates, but I expect it to reduce Japanese government bonds (JGB), which are considered tightening measures and positive for the Japanese yen and bearish for the USD/JPY pair.
I believe that if the Bank of Japan takes a hawkish stance on Friday, it’s unlikely that Japanese authorities will intervene to support the yen. The Bank of Japan may slightly raise its core inflation expectations for 2024, providing greater room for policy tightening. At the same time, Japan’s composite Purchasing Managers’ Index from Jibun Bank for April shows private sector growth accelerating at its fastest pace in eight months.
The weakness of the yen helps Japanese exporters sell their products in foreign markets but makes imports more costly in domestic markets. This has an inflationary effect on prices and forces the Bank of Japan to accelerate monetary tightening.
In my view, US data may have a greater impact on USD/JPY fluctuations this week, especially with the release of gross domestic product figures on Thursday and core personal consumption expenditure figures for inflation data on Friday.
While the Federal Reserve is expected to keep interest rates higher for longer amid stubborn inflation, this suggests that the large interest rate gap between the US and Japan will remain for some time, making overall risk sentiment fail to help the Japanese yen as a haven attract any buyers in the near to medium term.
Meanwhile, the US dollar continues to receive support from expectations of a hawkish Federal Reserve, acting as an upward force for the USD/JPY pair, and it seems traders are also hesitant ahead of the Bank of Japan’s decision next Friday. Economic data readings in the United States, which in my opinion will determine the short-term trajectory of the pair.
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