Yen Resumes Weakening Despite BOJ Intervention

The yen has resumed its weakening trend as the market seems to believe Japanese authorities will struggle to support the currency.

Stemming the Decline

It is speculated, though not yet confirmed by Japanese authorities, that the BOJ intervened three times last week. Twice in quick succession on Monday and again on Wednesday following the Fed's interest rate decision. This drove the USDJPY down to a low of 151.90 near the end of the week. The first intervention is estimated to have cost around $39.2 billion, with subsequent ones potentially smaller but totalling approximately $60 billion. The objective is understood to have been removing carry traders who are putting downward pressure on the yen to benefit from higher interest rates in other major currencies like the dollar and pound.

Despite the expense to the Ministry of Finance, the yen returned to weakening over the past week, as carry traders continue betting on yen weakness. Japanese authorities have again warned the market against "disorderly" moves that could weaken the currency too fast. However, carry traders may believe the Japanese government will not be willing to spend much to defend the currency. This view is somewhat supported by comments from US Treasury Secretary Janet Yellen encouraging "caution" on intervention, which could be interpreted as a sign the US does not support coordinated assistance for the yen at its juncture.

More Intervention or Let Go?

The Japanese government last intervened in September 2022, which led to an extended period of strength in the yen. However, this may be more attributable to expectations that the change in BOJ leadership would bring a more hawkish stance. Now that the BOJ has raised rates and removed yield curve control (YCC), intervention options may be limited. Raising rates more aggressively after such a prolonged ultra-easy policy could have unexpected economic consequences similar to the regional banking crisis in the US following the Fed's tightening.

Yet, Japanese officials prefer a weaker currency as it helps exports. This latest intervention came after the yen weakened further than in 2022. Official rhetoric has not been that the currency is too weak but rather that weakness is happening too fast. Therefore, the BOJ may be content to play more of a rearguard role with less intervention. This would allow the USDJPY to rise rather than an aggressive move to drive the currency in the other direction, which could harm the nascent economic recovery.

USDJPY Features Wedge Pattern

USDJPY's drop to 151.90 potentially completed a wedge pattern, indicating further downside towards 150.90 is possible. This move would take prices outside the upward-trending channel. However, 154.80 and 153.60 must give in before reaching lower levels. Alternatively, if some form of a looser flag pattern is seen instead, the pair could extend higher beyond 156.30 and 158.00, with the next mark above 160.25.

Source: SpreadEx USDJPY

Key Takeaways

The Japanese yen resumed weakening last week as carry traders continued betting on further depreciation. The BOJ is speculated to have intervened three times to support the yen, driving the USD/JPY down to 151.90. However, the yen weakened again as authorities may be unwilling to spend much on defending the currency. While officials prefer a weaker yen to boost exports, recent interventions aimed to slow fast moves rather than reverse the trend.​