Japanese Yen: Higher Japanese rates and intervention risks – MUFG

MUFG strategist Michael Wan argues Japanese rates "clearly have to head higher" after a positive Tankan survey, strong capital investment appetite and rising inflation expectations. He expects the Bank of Japan (BoJ) to raise rates sooner rather than later, sees a weaker Japanese Yen (JPY) via higher USD/JPY as a near-term release valve, and warns of elevated intervention risks around upcoming US data and holidays.

BoJ hikes and MoF intervention watch

"The one place where rates clearly have to head higher is in Japan. Yesterday’s Tankan survey was overall positive even as the survey responses were provided before the announcement of the US-Iran agreement. For one, appetite for capital investment by large enterprises remains strong. Second, the outlook for selling prices and inflation expectations rose further."

"While we think the BoJ should be raising rates and likely sooner rather than later, a key question by markets is to what extent the government will push back against that, and with that the release valve in the near-term will likely have to be a weaker exchange rate in higher USD/JPY."

"We would be quite wary in the near-term though of intervention risks, given the bias for Japanese authorities to intervene during periods of low liquidity and also if US data is supportive of the directional bias for Japan’s Ministry of Finance."

"With the upcoming NFP numbers, coupled with key US holidays, we could have a risk of intervention over the coming week."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)