Derek Halpenny at MUFG highlights that USD/JPY has moved back toward 160 after US CPI, keeping intervention risks elevated. At the same time, JGBs have sold off but sentiment is improving, with stronger household demand and potential tax incentives.

Household JGB demand supports Yen outlook

“The yen weakened sharply yesterday in response to the US inflation data and USD/JPY has returned closer to the 160-level, above which intervention becomes a much greater prospect.”

“There continue to be signs that confidence in the JGB market has improved, no doubt helped by the more active BoJ and the general consensus that within one or two hikes, the BoJ would be at the neutral policy rate.”

“There is also growing speculation that the government will soon make changes to incentivise JGB buying by including individual JGB holdings in tax-free NISA accounts and/or removing these holdings from inheritance tax.”

“Early signs of a shift in flows perhaps, and the more examples of this we start to see the more compelling the case will become of a more sustained turnaround in the multi-year trend of yen weakness. With intervention likely halting the prospects to the upside, and confidence in the BoJ improving, the risks certainly look more skewed to yen strength over the medium term.”