The firm points out a couple of key reasons as to why Japan might not be wanting to pull the trigger just yet despite constant pressure on the yen currency in the past week or so.
The first being the nature of the relationship between Japan and the US when it comes to foreign exchange affairs. Citi highlights that Tokyo will not act unless it has the full backing of Washington. And in that lieu, US Treasury secretary Bessent’s visit in May was vital as he endorsed Japan’s currency policy at the time.
It was a good signal but Citi argues that Washington’s backing could also depend partly on whether the Takaichi administration respects the BOJ’s independence and avoids excessively expansionary fiscal policies.
Besides that, Citi also does argue that the Takaichi government is one that seems to be less concerned about yen weakness than previous administrations.
There’s also the issue of IMF’s exchange-rate classification rules acting as a bit of a constraint. As a reminder, Japan is adopting a “free floating” exchange rate and that comes with limitations to intervene even in exceptional circumstances. However, Citi believes that Japan lawmakers and policymakers are more focused on sticking to G7 agreements and coordinating with the US on this – rather than worry about the IMF.
And lastly, Citi also sees that broader market conditions may be discouraging Tokyo from taking any sudden action. The firm says that growing volatility in the equities market, both domestically and globally, may see authorities turn more cautious. Adding that broad US dollar strength and risk aversion makes the yen weakness appear less profound, all else being equal.
As for what to look out for next, the firm notes that:
“We continue to see 160/162 as the range in which further intervention is likely, with the government likely to aim to push the USD/JPY down to 155/157. However, in order to maximize the medium-term effectiveness of intervention we believe the rate needs to fall to below 155 and absorb long-term USD-buy hedging demand at small and medium size enterprises (SMEs) more completely.”
This article was written by Justin Low at investinglive.com.
