USD/JPY retreats to 155.00 on safe-haven demand and BoJ rumors

USD/JPY falls to the 155.00 barrier on Tuesday as a combination of a risk-off market sentiment and rumors circulating that the Bank of Japan (BoJ) is poised to reduce its bond purchases support the Japanese Yen (JPY) and pressure USD/JPY. A reduction in bond purchases would put upward pressure on Japanese bond yields which are highly correlated to the JPY. 

The US Dollar (USD), meanwhile, bounces after the steep sell-off of the previous day when the US ISM Manufacturing PMI came out lower than expected in May, however, the rebound looks unconvincing. 

The fall in US manufacturing activity was mainly caused by a decline in the New Orders and Prices Paid components, indicating possible hamstrung future growth and lower inflation expectations. This, in turn, increased bets the Federal Reserve (Fed) might lower interest rates, with the probabilities of a rate cut in September rising to around 65%, according to the CME FedWatch tool. 

USD/JPY falls on rumors BoJ to cut bond purchases

USD/JPY declines over half a percent on Tuesday partly as a result of market rumors first reported by Bloomberg News, that the BoJ is considering reducing the number of bond purchases it makes via its quantitative easing (QE) programme. 

If implemented, the policy move will reduce demand for Japanese Government Bonds (JGB), raising yields (which move inversely to bond prices) and positively impacting the Yen which is highly correlated to bond yields.

“Reports suggest the BOJ may discuss reducing its bond purchases as early as next week’s meeting,” said Brown Brothers Harriman (BBH) on Tuesday. ”Policymakers will reportedly discuss the appropriate timing to slow its bond buying from around JPY6 trillion ($38.4 billion) per month currently, and whether the BOJ needs to provide more details to improve predictability,” the note went on.

“That the BOJ is discussing this matter even as Japanese Government Bond (JGB) yields move higher is a testament to its desire to continue normalizing policy,” added BBH. 

Currency Warning

USD/JPY was further hit by intervention fears. On Tuesday morning the Deputy Governor of the BoJ, Ryozo Himino, repeated concerns regarding how a weak JPY might be negatively impacting the economy, saying the BoJ needed to be “very vigilant” regarding currency moves. His comments suggested the BoJ might be gearing up for another direct intervention in FX markets to prop up JPY (negative for USD/JPY).

Himino further went on to discuss the impact the weak Yen was having on inflation. Although a weak Yen increases the costs of imported goods, thereby generating inflation – which is what the BoJ wants – it also reduces consumption as shoppers are put off purchases by high prices. The BoJ would prefer inflation to derive from higher wages, however, as this would lead to more spending, higher consumption and a more dynamic economy. 

The takeaway from Himino’s remarks is that they “ratcheted up concerns that the BoJ could confront the market with a hawkish policy move at its June 14 policy meeting,” said analysts at Rabobank. 

On the Radar 

US jobs data will be the focus for the pair this week, with just-released JOLTS Job Openings, showing a deterioration in the job market. The US Bureau of Labor Statistics (BLS) data showed 8.059 million job openings in April, which was below both the 8.34M expected, and the 8.355M in March. The data suggests a deterioration in the US job market. 

On Wednesday Automatic Data Processing (ADP) will release its payrolls figures for the private sector and on Friday, the big one – US Nonfarm Payrolls (NFP) – will reveal official labor statistics including payrolls, wage inflation and the Unemployment Rate. 

If the data later in the week shows a decline in line with the JOLTS report, the USD could weaken, pulling USD/JPY down with it.