Yen and Investors' Worries!

Among major currencies, the Japanese yen was at the center of the stage, as its long-term weakness puts traders on guard over any more potential intervention by the government. Earlier this month, when the government was seen intervening in currency markets, the Yen could regain some of its losses, with USDJPY falling back under 152 from its more than 34-year high of around 160.

 

Japanese inflation data confirms that factory inflation remained largely subdued in April, indicating less inflationary pressure on the Bank of Japan to keep tightening policy. However, a weaker yen could also increase producer inflation and thus concerns about rising consumer inflation.

 

According to published data and market conditions, we think that with this outlook, the Bank of Japan can start its hawkish policies earlier, as investors also expect the government to intervene even sooner. In late April and early May, Japan's Ministry of Finance intervened in the currency market.

 

On the central bank's policy front, the BoJ is still so dovish, with much lower interest rates and a massive gap between Japanese Government Bonds (JGBs) yields and those in other major economies. This gap among yields reduces the attractiveness of Japanese bonds, which in turn is an important factor in putting pressure on the yen against major currencies. Though on Monday the Bank of Japan sent a hawkish signal by cutting its offer amount for a segment of Japanese government bonds, market participants ignored that.

 

The International Monetary Fund warned against growing calls by some analysts to use monetary policy to slow the currency's decline, commenting that Japan's commitment to allow the yen to move flexibly will help the central bank focus on achieving price stability.

 

Compared to other major currencies, the JPY was much weaker against the USD, GBP, and EUR. However, in the USDJPY chart, the uptrend could also be attributed to a strengthening dollar. While the USD remains strong and its further movement in the short term depends on Wednesday's CPI numbers, it is difficult to predict its fate.

 

Economic data in Japan still supports continuing dovish policies, but these policies can raise the inflation rate rapidly, which ended with Mr. Ueda's last comment, where he mentioned that he is open to the idea of early interest rate increases if inflation rises at a faster pace than the bank’s projections.

 

While these kinds of comments can provide short-lived support for the Yen, investors will need to see an actual commitment by the BOJ in terms of monetary policy decisions to be convinced. Later this week, we will have the Japanese Q1 GDP numbers on Thursday.

 

A reading higher than the previous quarter's GDP can confirm the faster pace of expansion of the Japanese economy, providing some leeway for the BOJ to accelerate their monetary policy normalization by potentially increasing interest rates at a greater pace than what is expected, potentially bringing support for the JPY.

 

From a technical standpoint, USDJPY is clearly moving in an uptrend, with a strong pivot at 152. Only breaching this level can potentially alter market sentiment in the short term. However, from a long-term perspective, the bullish scenario would only shift to a bearish one if the pair falls below 140.