Commerzbank’s Thu Lan Nguyen writes that suspected MoF/BoJ intervention has strengthened the Japanese Yen (JPY), but questions how long gains will last. Markets still doubt the Bank of Japan's (BoJ willingness to respond forcefully to inflation, and see the JPY as a G10 laggard. However, relatively low rate expectations mean the BoJ could still meet or exceed what is priced in.

Intervention meets low policy expectations

"There was no official confirmation, but there were plenty of unofficial signals - including a “final warning” from a top official: the Ministry of Finance (MoF) and the Bank of Japan (BoJ) intervened in the foreign exchange market on Friday to strengthen the Japanese yen. The big question now is: How long will the JPY’s strength last?"

"That will depend on two things: the duration of the war in Iran and the accompanying inflation concerns, on the one hand. And the actions of the BoJ, on the other. For a key reason for the JPY’s weakness in recent weeks is that - unlike the ECB - the market does not trust Japanese monetary policymakers to respond particularly strongly to the current inflation shock."

"Admittedly, BoJ officials have so far done little to counter the market’s tentative expectations. Therefore, as long as their rhetoric does not change significantly (i.e., in a hawkish direction), the JPY is likely to remain the laggard among G10 currencies, i.e. downward pressure will return if tensions in the energy markets increase again."

"But what is the advantage of low expectations? They are easier to meet! In other words: provided the blockade of the Strait of Hormuz ends within the next few months, the much higher interest rate expectations for the ECB and the Fed are highly likely to be revised downward."

"In contrast, the odds are good that the BoJ will deliver the two rate hikes priced in by year-end, even if the situation in the gulf region were to be resolved soon."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)