Is Japan Ready to Intervene Against Yen Sellers? All Eyes Focus on CPI Data.
Is Japan Ready to Intervene Against Yen Sellers? All Eyes Focus on CPI Data.
By:Ilya Spivak
The Japanese yen may surge against the U.S. dollar if inflation spurs officials to intervene
The yen has plunged to a three-decade low as Fed rate cut expectations fizzle.
Japanese officials dislike the selloff but usually opt not to fight market trends.
Yen intervention may be triggered if Japanese CPI prints hotter than expected.
The Japanese yen has slid to the lowest level in 34 years against the U.S. dollar.
The currency seemed well-positioned at the start of the year as the Bank of Japan (BOJ) stood pointedly apart from other top central banks, nearly all of which aimed at cutting interest rates in 2024. That promised a narrowing of the yen’s yield disadvantage against its major peers and seemed like a potent tailwind.
As it happened, the yen began to strengthen in November as the Federal Reserve signaled its intent to begin cutting rates. It scored a potent gain of nearly 8% by the end of December. That trend was sharply aborted as U.S. economic data began to heat up in the first quarter, eating into the markets’ heady bets on a hefty 150 basis points (bps) in Fed easing.
Fading Fed rate cut bets are punishing the Japanese yen
Since then, sticky U.S. inflation has continued to erode the priced-in outlook for stimulus. Fed Funds futures now price in just 37bps in cuts this year. That amounts to one standard-sized 25bps reduction and a 52% probability of a second one. Fed officials stood by a call for 75bps in cuts last month but later comments hint at a hawkish rethink.
This does not change the underlying premise that the yen’s yield disadvantage against the greenback and other major currencies will probably contract this year. However, the scale of the change has been repriced in a decidedly negative direction for the Japanese currency.
Will hot Japanese inflation trigger yen intervention?
For their part, officials at the BOJ and Japan’s Ministry of Finance (MOF) have taken to a near-daily strategy of worrying aloud about the currency’s depreciation. This is meant to spook speculators with the threat of official intervention to prop up the yen and slow the selloff. There are reasonable concerns that yen weakness might see inflation reaccelerate.
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With that in mind, the March edition of Japan’s consumer price index (CPI) inflation report is in focus. The headline rate is expected to come in at 2.8% year-on-year, unchanged from the previous month. Citigroup data showing Japanese data outcomes have tended to overshoot forecasts since the start of the year hint at scope for an upside surprise.
The yen might edge up this scenario as markets dial up bets on another BOJ interest rate hike this year. Local authorities tend to wait for the market to begin a pullback from extremes before intervening, opting to amplify moves in the desired direction instead of fighting traders. A hotter CPI release may well trigger such an action.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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