USD/JPY slides after BoJ rate check

The Japanese yen has posted sharp gains today. USD/JPY is trading at 143.09, down 1.00% on the day.

Is Japan planning a currency intervention?

The yen has taken investors on a roller-coaster ride this week. On Tuesday, the dollar shined, posting broad gains against the majors and climbing 1.19% against the yen. The catalyst for the upswing was the US inflation report, which was higher than expected. The yen has recovered most of these losses today, after reports that the Bank of Japan had conducted a rate check, which could signal currency intervention in order to prop up the ailing yen.

The BoJ has rigidly maintained its ultra-loose monetary policy in order to stimulate Japan’s fragile economy. As part of this policy, the BoJ has kept a firm hand on its yield curve control, and the price for this stance has been a freefall in the yen, which is done an astounding 30% against the dollar this year. Japanese policy makers have fired verbal warnings about the yen’s depreciation causing deep concern, but the markets have learned to ignore the rhetoric, which hasn’t been backed up by any action.

The yen hit 144.99 last week, a new 24-year low, and there has been speculation that 145 is a line in the sand for Japan’s Ministry of Finance, which would be responsible for a currency intervention by purchasing a massive amount of yen with US dollars on the currency markets. Japanese officials haven’t ruled out intervention, but there is a legal hurdle as Japan cannot intervene in the currency markets without permission from the G-20. The last time Japan intervened to prop up the yen was in 2011, in the middle of a financial crisis in Asia. Still, investors will be paying close attention to the BOJ’s meeting on September 22, which comes just one day after the Fed’s next meeting. Any hints of intervention could send the yen sharply higher.

If, however, Japan decides once again to stay on the sidelines, the yen has more room to fall. The Fed is likely to raise rates by 75bp at the upcoming meeting, but there is a reasonable possibility of a massive 100bp hike as well. With the yen at the mercy of the US/Japan rate differential, I expect the yen to continue to lose ground, barring some dramatic action from Tokyo.

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USD/JPY Technical

• 1.4363 is the next line of resistance, followed by 144.81
• USD/JPY has support at 142.56, followed by 141.88

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