Japanese Yen decline halts a few pips shy of 160.00 as intervention risks grow

The Japanese Yen (JPY) trades practically flat against the US Dollar (USD) on Thursday, following a nearly 1.25% selloff over the previous two days, hammered by growing monetary policy divergence between the Federal Reserve (Fed) and the Bank of Japan (BoJ). The USD/JPY rally has stalled around 159.80, as the 160.00 level is considered a key milestone for Tokyo authorities.

Investors have ramped up US Dollar long positions following hot US consumer inflation data earlier this week and a string of hawkish comments from Fed officials calling for another interest rate hike in December. 

Futures markets are fully pricing in further Fed tightening after the US central bank’s meeting on December 9, with a nearly 10% chance of a half-point rate hike, according to data from the CME’s FedWatch Tool. Later on Thursday, a myriad of Fed officials will hit the wires and provide a clearer picture of the bank’s near-term plans.

Dovish BoJ comments dampen expectations of a December rate hike

In Japan, the scenario is diametrically different, especially after BoJ policymaker Toichiro Asada, one of the two dovish dissenters at September’s meeting, warned that pushing borrowing costs higher might weigh on growth and underlying inflation. These comments cast doubt over market expectations of another rate hike at the next meeting, due on December 17, and have added pressure on the Japanese Yen.

Data from Japan released earlier on the day has been supportive, as producer inflation figures provided further reasons for BoJ hawks. The Producer Price Index (PPI) accelerated to 7.1% in the 12 months to October, beating expectations of a 6.5% reading and following a 6.8% growth in September.

Analysts at MUFG, however, see the Yen supported by “signs that confidence in the JGB market has improved, no doubt helped by the more active BoJ and the general consensus that within one or two hikes, the BoJ would be at the neutral policy rate.” Considering this, and with “intervention likely halting the prospects to the upside, and confidence in the BoJ improving,” MUFG experts conclude that “the risks certainly look more skewed to Yen strength over the medium term.”