The higher USD/JPY climbs, the more frequently Japanese officials resort to verbal interventions. According to Finance Minister Shunichi Suzuki, the yen's movement is showing a one-sided dynamic. This will require authorities to take appropriate measures if the trend becomes excessive. The government and the central bank will react to sharp fluctuations in currency exchange rates in the Forex market if necessary. The hint of currency interventions is evident; however, the current situation is fundamentally different from the events at the end of 2022.
Back then, the weak yen seriously worsened Japan's current account balance due to high energy prices. Currently, the cost of gas has significantly dropped, and oil has lost about 13% since the beginning of the year. Furthermore, the rally in USD/JPY is contributing to an influx of foreign tourists to Japan. In the first quarter, they spent approximately 88% of the total amount spent in 2019. This factor improves the state of external trade.
Current Account Dynamics and Expenditures by Non-Residents in Japan
Unlike the end of 2022, when central banks had no intention of halting the process of tightening monetary policy, now they are approaching its completion. The Federal Reserve will raise the federal funds rate by 50 basis points. Therefore, currency interventions may not be necessary. USD/JPY itself will gradually decline over time. Why spend $62 billion?
The cheap yen leads to an increase in corporate profits for Japanese export-oriented companies and boosts stock indices. Since the beginning of the year, the Nikkei 225 has grown by 27%, which is significantly better than the American S&P 500. Investment inflows into Japan have a positive impact on its economy. The central bank benefits from the devaluation as well. It is tasked with breaking deflationary thinking, and it is gradually succeeding.
Officials understand that the current rally in USD/JPY can be seen as a correction within a potential downward trend. If the health of Japan's economy improves and the Bank of Japan (BoJ) achieves its inflation targets, it will begin normalizing monetary policy. This will become the main driver of the yen's strengthening against major world currencies.
However, the risks of currency interventions should not be disregarded. At the end of 2022, two interventions by the Tokyo government in the Forex market resulted in sharp fluctuations in USD/JPY, which led to significant financial losses. Therefore, the question of at what level yen purchases will begin now is crucial for investors. Last year, the levels mentioned were 146 and 152. Currently, Bloomberg experts name the levels of 145 and 150. The first one is within easy reach.
Technically, there is no doubt about the strength of the upward trend in USD/JPY. The pair has surpassed the boundaries of the previous upward trading channel and the fair value range. This indicates the total advantage of the bulls. The target levels of 142.5 and 144 for previously formed long positions have been achieved. It is time to raise them to 145.3 and 148. The recommendation is to buy.