BoJ Governor UEDA Kazuo

US dollar/yen bulls have twice been rebuffed at 152 in recent years. Will it be a case of third time lucky? US dollar/yen reached 152 in October 2022, but was rebuffed as the Bank of Japan sold near USD43bn in its largest ever FX intervention. It had already started the sell US dollars in late September around the mid-140’s, but it was the intervention on October 21st, 2022, and again on October 24th that really seemed to turn the tide as the US dollar was back to just above 130 by the end of that year. Fast-forward a year and US dollar/yen once again found itself up at 152 and again this level proved a bridge too far for the US dollar bulls.

By the end of 2023, the US dollar was down to just over 140. But this time no intervention was needed. US dollar/yen seemed to turn around of its own accord, although the October 31st decision by the BoJ to tweak its yield curve control policy, to allow higher 10-year yields may have played a part.

The first point to make about these two episodes is that US dollar/yen is once again pushing close to 152. If the US dollar bulls can make it third time lucky it could open up significant upside for the US dollar, and significant angst for the Japanese government and the BoJ.

A second point is that these pullbacks in US dollar/yen from the 152 level in October 2022 and November 2023 also saw significant pullbacks for the US dollar against other currencies such as the euro and the pound. Given this we might reasonably argue that the success or failure of US dollar/yen in surpassing this 152 level could hold the key to how the US dollar trades more generally. For instance, if dollar/yen scales 152 significantly and holds above this level it might prove the key that unlocks the door to sub-1.05 levels for euro/US dollar, possibly putting parity in sight.

So, what is likely to happen? Could the BoJ intervene again? Mr. Steve Barrow, Head of the Standard Bank G10 Strategy, said it would be possible but the situation for US dollar/yen now does not appear as precarious as it was when the BoJ intervened back in the autumn of 2022. Back then the US dollar had undergone a powerful 6-month rally, spurred by big, 75-bps per meeting, Fed rate hikes. As a result, implied volatility in dollar/yen was very high, reaching over 14 vol which compares to today’s levels of just above 9 vol in the 3-month maturity.

At the same time 3-month dollar/yen risk reversals had become bid for dollar calls back in the summer of 2022 which is unusual as they are almost always bid for dollar puts. This flipping of risk reversals has often been a spur for the BoJ to act in the past. But today risk reversals are back to more normal levels.

In short, it is harder for the BoJ to argue today that the FX market is too volatile. That does not rule out FX intervention at all but it suggests that it would be pretty ineffectual compared to the sharp turnaround in US dollar/yen that we saw in October 2022. What about a tightening of monetary policy from the BoJ? After all, that appeared to be a factor in the 2023 dollar/yen turnaround, and we know that the Bank seems to be lining up such a move. What’s more, the tweak in the YCC policy in October 2023 occurred at a time when it was not clear if the Fed had finished with its own rate hikes, while today the focus is clearly on Fed cuts, not possible hikes.

In other words, monetary tightening by the BoJ now, or soon, could be more effective in turning around dollar/yen than in the past. But will the BoJ want to give the impression that it is tightening policy to lift the yen, rather than as a sign of its success in bringing inflation sustainably back to target?

Mr. Steve Barrow said it would be possible that yen weakness past 152 could make the BoJ more, not less, reticent to lift rates in the spring but even if US dollar/yen does temporarily push above 152, the combination of policy action by the Fed and BoJ, combined with the latent threat of intervention will still be sufficient to render the rise temporary. More than this, those looking to sell dollar/yen with a view to the outlook over the next year, or two, would do well to use any rise to 152 to their advantage and sell.