MUFG’s Michael Wan highlights ongoing strength in the Japanese Yen, with recent USD/JPY volatility seeing the pair drop toward 152.88 before stabilizing near 153.26. Mixed Japanese data, including stronger labour cash earnings and softer GDP, have not altered expectations for a 25 bps BoJ rate hike in September, keeping attention on BoJ communication and Yen-supportive policy signals.

Yen strength, BoJ path and risks

“The focus in our part of the world is still on the ongoing strength in the Japanese Yen, while also keeping an eye out on other global factors such as spikes in oil, the US Treasury’s buyback plans, coupled with importantly US CPI later this week.”

“We saw some volatility over the past day in USD/JPY, with the pair falling to as low as 152.88, and settling around 153.26 at the time of writing.”

“Overall, these numbers do not seem to have changed the pricing of BOJ rate hike for September, with markets essentially fully priced for a 25bps hike, and with the focus of the markets likely to be on the BOJ’s communication for the longer-term rate path.”

“Meanwhile, US Treasury Secretary Scott Bessent challenged traders and the market to counter his efforts to strengthen the Yen, essentially saying he has more information than others on what Japanese policymakers and the BoJ will do.”

“Looking back at history, sharp moves lower in USD/JPY of 10% or more are not uncommon, but whether this happens due more to domestic factors, or external drivers such as risk-off episodes and with that a sharp pick-up in vol also matter for other markets.”

“So far, the moves are more consistent with domestic drivers in Japan as the dominant factor, and as such EM in general and also carry trades have remained very resilient, but this is still a risk to watch for moving forward.”