MUFG’s Michael Wan notes the Japanese Yen has strengthened below 154 against the US Dollar (USD), its firmest level since February, as markets price faster Bank of Japan tightening. A 25 bps hike at the 18 September Bank of Japan (BoJ) meeting is seen largely priced, with focus shifting to future rate guidance. Wan projects USD/JPY drifting towards the low 150s over time as the BoJ hikes in September and January.

Yen strength and BOJ path

“The Japanese Yen strengthened to below the 154 level against the Dollar, its strongest since 23 February, amidst holiday-thinned US trading, likely positioning adjustments ahead of upcoming risk events, coupled with ongoing market pricing on a faster pace of monetary policy tightening by the Bank of Japan.”

“A 25bps hike at the BOJ’s 18 September meeting has already been largely priced in, while attention is shifting towards the BOJ’s communication about the broader path of rate hikes at subsequent meetings.”

“Latest data from the CFTC as of 1 Sep suggests that Yen shorts started to rebuild post the joint US-Japan intervention at the end of July, and the recent moves in USD/JPY corroborate with some potential reduction in Yen shorts given the scale of the existing positioning coupled with being consistent with historical patterns.”

“Meanwhile, Japan’s Foreign Reserves data for August also highlighted the potential magnitude of intervention. Japan’s foreign reserves fell by 6.2% to USD$1,208bn, with securities holdings in particular declining by USD$87.8bn to USD$839.6bn.”

“Overall, our Japan and global teams are forecasting USD/JPY to move towards the low 150s level over time, with the BOJ hiking in the September and January policy meetings.”