Before the showdown with the Bank of Japan on the last day of this month, Japanese yen traders who were hit by suspected interventions once again faced many obstacles.
Although obvious intervention has played a boosting role and the bullish drop of US Treasury yields has also put pressure on the overall US dollar, the yen rose less than 2% against the US dollar last week. This indicates that the yen needs more help from the Japanese authorities to decisively break free from its downward trend.
The yen has fallen 11% so far this year, increasing Japan's inflation pressure and making it likely for the Bank of Japan to raise interest rates on July 31, the second time since 2007. Bloomberg's survey of economists shows that Japan's inflation rate in June is expected to rise slightly to 2.9%, well above the Bank of Japan's target of 2%.
Yujiro Goto, head of forex strategy at Nomura Securities in Tokyo, said: "If the yen remains weak at the July meeting, the Bank of Japan will need to consider raising interest rates even if it decides to reduce bond purchases." Nomura Securities said last Thursday (July 11th) in a report that this obvious intervention is putting pressure on the Bank of Japan to tighten its policy.
Data from the forward market shows that the probability of the Bank of Japan raising interest rates by 10 basis points has dropped from 59% before last Thursday's strengthening in the yen to 51%. This leaves room for the yen to rebound after the central bank raises interest rates, but even so, any increase may be insufficient to shake off the bearish trend.
Some analysts believe that if the Bank of Japan raises interest rates in addition to announcing a reduction in bond purchases, its measures may be seen as being driven by fluctuations in the yen, rather than its mission to stabilize prices.
Goto believes that if the Bank of Japan raises interest rates by 15 basis points, the yen may rise by 2-3 yen, but it is unlikely that the increase alone will be sufficient to change the trend of the US-Japan currency pair. The forward market transaction shows a probability of only about 35%.
Similarly, although Barclays Bank expects the Bank of Japan to raise interest rate targets to 0.25% this month, it believes the impact on the exchange rate is limited and expects US-Japan to reach 160 by the end of this quarter. Last Friday, one US dollar was worth 158 yen.
Bloomberg's analysis of central bank accounts shows that Japan may have spent about 3.5 trillion yen ($22 billion) last Thursday to support the yen, apparently its third intervention this year.
"Although the yen's weakness has raised expectations for the central bank's interest rate hike this month, we believe that the difference in domestic and foreign yields is too large to sustain the reversal," said Mitul Kotecha, head of Asian forex and macro strategy at Barclays in Singapore.
The yen bulls are likely to eventually pin their hopes on US retail sales data to be released on July 16th, which shows that the world's largest economy is slowing down. This should further pressure US Treasury yields and depress the US-Japan exchange rate. But if the data is strong, their focus will quickly shift back to the Bank of Japan's policy decisions.
Ray Attrill, head of forex strategy at National Australia Bank in Sydney, said: "If there is no change in interest rates, we are likely to see new yen sales."