USD/JPY Suppressed Close to the September 2022 Intervention Levels

USD/JPY Analysis

Back in September 22 and following repeated supportive comments, Japanese authorities had intervened in the FX market to prop the failing Yen ^[1], as USD/JPY was at the time registering a nearly 24% rally in 2022. The action had come at the 145.00-146.00 region, with the pair reacting lower, but eventually hitting a month later new highs not seen since 1990 (151.95).

Just before that FX intervention, the US Fed had delivered another 75 basis points rate hike, while the bank of Japan had maintained its ultra-loose policy setting, with rate at -0.1%. Fast-forward to today and the monetary policy landscape, although not the same, is not that different either.

The Bank of Japan, had opened the door to policy normalization back in December 2022 with the widening of its yield curve control (YCC), but there has been no follow through. Officials are not in a hurry to make further changes, repeating this month that they will "patiently continue with monetary easing" ^[2]. However, the Summary of Opinions showed some support for a YCC revision ^[3]. The US Fed kept rates at 5.25% this month, after ten consecutive increases, but it upgraded its median terminal rate projection to 5.6%. This implies an additional 50 basis points of hikes this year. ^[4]

This maintains the significant policy divergence between the BoJ and the Fed, fueling the USD/JPY strength. The pair heads towards its third straight profitable month, with gains of around 9.5% this year as of Monday's close, moving closer to the 2022 intervention levels. This week we have seen a couple of Japanese officials supporting the Yen verbally, as reported by Reuters, creating risk for another intervention. ^[5], ^[6]

USD/JPY is contained this week due to this commentary and rising risk for action by Japanese authorities. This creates scope for a pullback, but strong catalyst would be needed for breach of the EMA200 (139.80). Daily closes below it could pause the bullish momentum, but the downside is well-protected form that level on.

In spite of the headwinds we see at the beginning of this week, the policy differential between the two central banks remains stark, favoring the greenback. Furthermore, even if authorities step in, lasting impact is unlikely unless the BoJ changes its stance. Bulls are at the driver's seat with the ability to push for the pre-intervention high (145.90), although 148.83 looks distant at this stage.