The Japanese yen has experienced a decline of over 13% this year due to widening interest rate differentials, creating the risk of further FX intervention. Despite recent positive news, the outlook for the yen remains negative, and a trend reversal is not likely in the near future.
The currency’s downward trajectory has been driven by interest rate differentials, with the Bank of Japan maintaining negative rates while foreign central banks, such as the Fed, have raised rates. This has caused capital to leave Japan in search of higher returns abroad. Additionally, high energy prices have also negatively impacted the yen through the trade channel, as Japan imports most of its energy, leaving the nation deprived of its historical trade surplus.
Despite recent declines in US bond yields and oil prices, the yen has failed to recover, signaling significant reluctance from traders to buy the currency. This reluctance has increased the risk of another round of FX intervention. Japanese authorities have warned of potential action but have not indicated imminent intervention.
The thresholds for intervention remain unclear, with some strategists suggesting that a break above the 152.00 region in the USD/JPY chart could trigger intervention, but the lack of urgency in the finance minister’s tone suggests a higher threshold around the 155.00 level.
Looking ahead, the outlook for the yen in the near future remains bleak, with implied volatility in short-dated USD/JPY options falling and no trend reversal anticipated. However, the longer-term outlook appears more promising as global economic growth slows and markets anticipate a potential rate-cutting cycle in the spring, which could provide relief for the yen. Additionally, the Bank of Japan may consider tightening policy and abandoning yield curve control, which could help revitalize the currency.
In conclusion, while the risk of intervention remains, the bigger picture suggests a more promising outlook for the yen as interest rate differentials compress next year, potentially marking the end of the currency’s downward trend.
