USD/JPY: Is Japan Mulling an Intervention?

07/05/2023

2 minutes read

2023.07.05 06:50

MarketPulse

Japanese Services PMI continues to expand
Federal Reserve to release June meeting minutes on Wednesday

continues to have a very quiet week and is trading at 144.36, down 0.07%, in the European session.

Japanese Services PMI points to growth

Japanese business activity continues to expand. The Services PMI, released on Wednesday, was revised lower to 54.0 in June from 54.2. This was lower than the record-high 55.9 in May but indicated that the services economy remains strong. The 50.0 level separates expansion from contraction.

The solid services data was a welcome contrast from Monday’s soft manufacturing numbers. The Manufacturing PMI was unrevised at 49.8 in June, down from 50.6 in May. Manufacturing has sputtered, posting five contractions in factory activity this year. The discrepancy between the services and manufacturing sectors is not unique to Japan, as we’re seeing a similar trend in most of the major economies.

Weak yen could trigger intervention

The Bank of Japan is showing little appetite for tightening its ultra-loose monetary policy. Governor Ueda has said that he would consider a tighter policy if wage growth rises and high inflation remains sustainable. In the meantime, Ueda hasn’t veered from the BoJ’s stance that inflation, which remains above the BoJ’s target of 2%, is temporary.

The Japanese yen has been paying the price of the BoJ’s policy. The US/Japan rate differential continues to widen, as the Fed keeps hiking and the BoJ stands pat. The yen has fallen close to 9% since April 1st, which has triggered verbal intervention from the Ministry of Finance (MoF). In September 2022, the MoF stunned the markets when it intervened after the yen fell to 145. With the yen just shy of that level, there is concern that the MoF could intervene in the currency markets in order to prop up the listless yen. Japanese officials aren’t giving away any clues, saying only that all options remain on the table. If the yen breaks below 145 and moves closer to 150, the possibility of another intervention will increase.

The Fed will release the minutes of the June meeting later today. The markets are widely expecting a 0.25% hike at next week’s meeting and investors will be looking for some clues in the minutes as to the Fed’s rate path. The markets are more in sync with the Fed’s aggressive stance than they were a few months ago, when rate cuts were expected before the end of the year. Now, the markets are not expecting the Fed to trim rates before early 2024.

USD/JPY Daily Chart