MUFG: BOJ more likely to elevate charges subsequent month, MOF beneath stress to intervene

MUFG highlights the yen’s recent weakening trend and anticipates the Bank of Japan (BoJ) raising rates at next month’s meeting. Concurrently, the Ministry of Finance (MoF) faces increased pressure to intervene in the currency markets to prevent the yen from further depreciation beyond critical levels.

Key Points:

1. Yen Weakness and Intervention Reversal:

   • USD/JPY has risen back above 159.00, approaching the year-to-date high of 160.17 from April.
   • The impact of Japan’s intervention in late April/early May to support the yen has nearly fully reversed.

2. Yield Spread Dynamics:

   • Despite the narrowing of the 2-year yield spread between US and Japanese government bonds from a peak of around 4.75% in April to a 30bps decrease, the yen continues to weaken.
   • The yield spreads remain at their widest levels since the late 1990s/early 2000s, insufficient to reverse the yen’s weakening trend.

3. MoF Intervention Pressure:

   • The yen’s re-weakening increases pressure on the MoF to intervene again if USD/JPY breaks above 160.00 and the pace of the yen sell-off accelerates.
   • Previous interventions have had limited lasting impact, suggesting the need for more substantial or coordinated efforts.

4. BoJ Policy Normalization:

   • The weakening yen also puts pressure on the BoJ to expedite its policy normalization process.
   • MUFG expects the BoJ to raise rates by 15bps at next month’s policy meeting.
   • Additionally, the BoJ is anticipated to announce detailed plans to slow the pace of Japanese Government Bond (JGB) purchases over the next couple of years.

Conclusion:

MUFG forecasts that the BoJ will raise rates by 15bps at the upcoming policy meeting and announce plans to reduce JGB purchases. Concurrently, the MoF may face increased pressure to intervene in the currency markets to prevent the yen from depreciating beyond critical levels, particularly if USD/JPY breaches 160.00. The combination of BoJ policy adjustments and potential MoF interventions aims to stabilize the yen and address the ongoing currency depreciation.

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