The yen has been weakening recently, with USD/JPY rising above 159.00 and approaching the year-to-date high of 160.17 from April. Despite Japan’s intervention in late April/early May to support the yen, the impact has nearly fully reversed.
Even though the 2-year yield spread between US and Japanese government bonds has narrowed, the yen continues to weaken. The yield spreads are currently at their widest levels since the late 1990s/early 2000s, which is not enough to reverse the yen’s weakening trend.
This re-weakening of the yen has put pressure on the Ministry of Finance (MoF) to intervene again if USD/JPY breaks above 160.00 and the pace of the yen sell-off accelerates. Previous interventions have not had a lasting impact, so more substantial or coordinated efforts may be necessary.
The Bank of Japan (BoJ) is also feeling the pressure to expedite its policy normalization process due to the weakening yen. MUFG anticipates the BoJ to raise rates by 15bps at the next policy meeting and to announce plans to slow down Japanese Government Bond (JGB) purchases over the next few years.
In conclusion, MUFG forecasts that the BoJ will raise rates by 15bps at the next policy meeting and announce plans to reduce JGB purchases. The MoF may need to intervene in the currency markets to prevent the yen from depreciating further, especially if USD/JPY breaches 160.00. The goal is to stabilize the yen and address the ongoing currency depreciation.
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