Yen before the prospect of further BOJ interventions?

In the absence of key releases today, the currency market's attention is shifting back towards Bank of Japan. After the last dovish-hawkish decision, which brought the first increase in years, but without any prospects for a lasting and thorough change in policy, markets are beginning to wonder whether the expansion of the Japanese economy will put decision-makers against the proverbial wall.

The USD/JPY pair fell from historic highs today, despite dovish comments from BoJ's Tamura, who pointed out that the bank is likely to maintain a dovish monetary policy. So what happened?

Is the scale of yen weakening not desirable?

The upward movement in the dollar-yen was quickly reversed and the yen is now strengthening, a USD / JPY is losing dynamically despite the strong dollar. The dovish mood around Japan was negated by unexpected reports about the planned meeting of the BoJ, MoF and FSA institutions. They will discuss the situation on international financial markets. Moreover, the meeting itself will be followed by a conference with the participation of Kanda, a Japanese diplomat for currency affairs. Theoretically, this could indicate that the current scale of yen weakening is not desired by the BoJ. Perhaps this opens the way to further currency interventions.

Further weakening of the yen means again a record positive impact on the profits of the largest Japanese exporters, which pleases the stock market. However, if we take a closer look at it, we will come to the conclusion that the record-breaking results of companies will make the trade unions associated with Rengo find further arguments to negotiate high (in Japanese conditions, until recently deflationary) increases. This is a closed loop that suggests that while the BoJ may stick to its dovish policy, it may lack the fundamental factors to maintain it. The expansion of the economy of the Land of the Rising Sun in the medium term, it may put pressure on USD/JPY and strengthen the yen.

Mild, long-lasting change

Kanda, who began his speech, pointed out that a 4% decline in the yen in two weeks could hardly be called a 'mild move', which makes the scenario of an intervention on the yen more probable. Will we see gradually more hawkish tones from Japan? It's possible, but we should expect a gentle, long-lasting change rather than a sudden outburst. The question is how the economy will value it and whether The global economic situation will not support the hawkish narrative, which, as long as Japanese businesses are doing much better than in the previous two decades, has a lot of fuel for gradual growth.

Today we pay 3,97 for the dollar, 4,31 for the euro, 5,03 for the pound sterling and 4,40 for the Swiss franc.

Source: Eryk Szmyd, XTB