USD/JPY enters BoJ intervention zone after rallying into 151.000s

• USD/JPY rallies up to multi-year highs in the 151.000s – a historical BoJ intervention zone. 
• The move is backed by USD strength as interest rates are seen remaining high in the US. 
• The BoJ raised interest rates but this did not defend the Yen as expected, since Japanese rates remain extremely low. 

The USD/JPY rallies to multi-year highs in the 151.000s on Wednesday on the back of broad-based US Dollar (USD) strength ahead of the Federal Reserve policy meeting and a “one and done” trade weakening the Japanese Yen (JPY). 

The USD/JPY is reaching an intervention zone where the Bank of Japan (BoJ) has historically been known to intervene in FX markets to prop up the Yen, and this could provide an obstacle to more upside for the pair. 

USD/JPY enters intervention zone 

The USD/JPY has rallied back up to the level of previous multi-year highs in the 151.000s. Both  in October 2022 and 2023 the pair rose to the 151.000s amid JPY weakness and USD strength, however, both times it was pushed back down. 

The reason for the reversal at this level has been put down to the fact it is an intervention zone for the BoJ. Above 150.000 the Yen becomes uncomfortably weak for the BoJ and it tends to intervene to prop it up using its FX reserves to buy Yen, according to analysts at MUFG. 

“A break of that high (2023 high) could well be accepted in Tokyo but we would still assume intervention would happen quite soon after that, especially with the BoJ’s action this week at least now consistent with Yen buying intervention.”

This suggests USD/JPY could be close to a peak. 

Yen weakens after BoJ meeting, in counter-intuitive move

The Yen has sold-off after the Bank of Japan (BoJ) ended eight years of negative interest rates and made its first interest rate hike since 2007. On Tuesday, the BoJ raised interest rates from minus 0.1% to a range between 0.0% and 0.1%. 

Normally such a move would be expected to strengthen a currency, since higher interest rates attract greater inflows of foreign capital, however, in the case of the Yen the opposite happened. 

One reason given for the Yen’s counter-intuitive response is that despite the hike, interest rates in Japan are still so low relative to other countries that JPY remains a favored “funding currency” by international investors. This means they borrow in the Yen (because of the low interest repayments) in order to buy other currencies which pay higher interest rate returns. 

“The broad-based view is that the gulf in interest rates between Japan and many other central banks in the G10 space means that the Yen will still be used as a funding currency in a low-volatility world.” Say analysts at ING. 

A further reason for the Yen weakness following the BoJ decision is the view that the interest rate hike was just a “one off” rather than the start of the hiking cycle. 

“While the BoJ may be able to hike rates again this year, this prospect currently remains highly uncertain.” Say analysts at Rabobank. 

Much depends on whether wage gains negotiated by Japanese workers’ unions percolate out to the wider working population, since only 30% of workers belong to unions. 

“Assuming the strong pay deals awarded to unionised workers spread out to the 70% of employees who are not in a union, Japan’s real wage growth could soon be turning higher. Policymakers will be hoping that this boosts consumption which in turn supports corporate profitability. This would indicate that the BoJ’s virtuous cycle is complete.” Says Rabobank. 

USD/JPY rally put down to USD strength 

The US Dollar is gaining ground across the board on the back of expectations the Federal Reserve (Fed) will keep interest rates higher for longer in the US, due to stubbornly high inflation. This too is a factor in the USD/JPY’s gains. 

There is even speculation that the Fed will reduce the number of rate cuts it expects to make in its Summary of Economic Projections (SEP), a set of forecasts which it publishes at the same time as it announces its monetary policy decision. 

In the December SEP the Fed forecast three 0.25% rate hikes in 2024, but analysts at Nordea Bank and Macquarie, to name two, are expecting that to be reduced to two cuts in the March SEP.

"The Fed will likely need to revise its growth and inflation projections higher for 2024. This could lead to a median FOMC dot plot that shows only two rate cuts this year compared to the latest projection for three rate cuts, made in December 2023.” said analysts at Nordea in a recent note. 

David Doyle, head of economics at Macquarie, meanwhile said,“The summary of economic projections will be updated and contains hawkish risks in our assessment with the committee potentially projecting fewer cuts in 2024." 

Such a move by the Fed could be even more bullish for USD and USD/JPY, in the short term.