Japanese Yen Nears a Multi-Decade Low, Will Talk Turn to Action?

Japanese Yen Prices, Charts, and Analysis

• Verbal intervention is not strengthening the Japanese Yen .
• Official intervention may now be needed to move the dial.

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Warnings Fall Short

The Japanese Yen is weak and is set to remain weak in the coming days unless Japanese officials turn from verbal intervention – trying to talk the Yen up - to official fx-market intervention. A range of Japanese government, BoJ, and MoF officials have opined over the past few weeks telling the market, via certain phrases, that the Japanese Yen is too weak for their liking and that they are ‘closely watching’ the situation. These warnings however have fallen on deaf ears as the Yen remains within touching distance of making a fresh, multi-decade low against the US dollar .

If talking fails to strengthen the Yen, the BoJ has several tools at its disposal:

Interest Rates: A Double-Edged Sword

One of the most potent tools in the BOJ's arsenal is setting interest rates. Lower interest rates make borrowing cheaper, stimulating economic activity and potentially weakening the Yen. This is because investors might seek higher returns elsewhere, leading to a decrease in Yen demand. Conversely, raising interest rates attracts foreign investment due to better returns, strengthening the Yen.

Yield Curve Control: A Delicate Balance

The BOJ also employs Yield Curve Control (YCC), a strategy where they target a specific range for long-term Japanese government bond yields. By influencing bond yields, the BOJ indirectly affects short-term interest rates and overall market sentiment towards the Yen.

Foreign Exchange Intervention: A Direct Approach

In extreme circumstances, the BOJ can directly intervene in the foreign exchange market. This involves buying or selling Yen to influence its exchange rate. Buying Yen strengthens it while selling weakens it. However, this approach can be expensive and is often used in conjunction with other policy tools.

USD/JPY : The Market of the Bank of Japan?

USD /JPY has remained just below 152.00 for the last two weeks with any small pull-back being bought. The tight trading range seen since the end of March – using the CCI indicator - suggests that traders are becoming increasingly wary of making any new directional bet, especially if officials are closely watching any potential break higher. The daily chart shows a positive setup with a bullish flag formation visible, while the spot USD/JPY price is above all three simple moving averages. A breakout is on the way, either a technical break higher or an official intervention break lower and traders should be prepared for a sudden bout of volatility.

USD/JPY Daily Price Chart

Retail trader data shows 14.67% of traders are net-long with the ratio of traders short to long at 5.82 to 1.The number of traders net-long is 3.77% higher than yesterday and 4.04% lower than last week, while the number of traders net-short is 4.86% higher than yesterday and 2.22% higher than last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/JPY prices may continue to rise.

Download the Latest IG Sentiment Report and discover how daily and weekly shifts in market sentiment can dramatically impact the price outlook: