The Bank of Japan can’t save the yen

That headline, “BoJ can’t save the yen”, is a cracker from ING, straight to the point.

ING warns the BoJ cannot save the yen, sees USD/JPY challenging the 2024 high of 162 and flags an outside risk of authorities holding off intervention until the 165 area.

Summary:

• USD/JPY dipped modestly after hawkish dissent at Tuesday’s BoJ meeting but ING says the case for sustained yen strength remains unproven
• ING argues the BoJ was already running an accommodative policy before the Middle East crisis and its slow tightening pace risks pushing real rates further into negative territory
• A 25bp BoJ hike in June or July, taking the policy rate to 1.00%, would still leave real rates negative given core inflation expected above 2%
• ING expects upside pressure on USD/JPY to persist near term, with a steady dollar and a potentially hawkish Fed adding to yen headwinds
• The bank sees USD/JPY challenging the 2024 high of 162, with an outside risk that authorities hold intervention until the 165 area
• Japanese FX intervention is seen as less potent than in 2024, with speculative yen shorts currently around half the size that triggered the summer 2024 short squeeze
• ING notes the yen remains very cheap to hedge, limiting its appeal even for investors constructive on Japanese equities

ING has warned that the Bank of Japan is not in a position to arrest the yen’s decline, arguing that the central bank’s cautious approach to tightening leaves the currency increasingly exposed as elevated energy prices push real interest rates deeper into negative territory.

The note, published after Tuesday’s BoJ policy meeting, acknowledged a modest dip in USD/JPY following hawkish dissent among board members, but dismissed it as insufficient to change the broader picture. ING’s central argument is that currency markets are now focused primarily on real interest rates and the willingness of central banks to defend their economies from inflation. On that measure, the BoJ falls short.

The bank points out that Japanese monetary policy was already accommodative before the Middle East conflict broke out, and that the central bank’s go-slow on rate rises risks compounding the problem. Even a 25 basis point hike at the June or July meeting, which would take the policy rate to 1.00%, would do little to rescue the yen. With core inflation expected to remain above 2% across the BoJ’s forecast horizon, such a move would still leave real rates in negative territory. Meanwhile, the BoJ is bracing for a deteriorating terms-of-trade shock from elevated energy costs, an uncomfortable position for a major energy-importing economy.

ING draws a comparison with the energy shock of 2022 but notes the current episode has so far been smaller in scale. Nevertheless, it expects negative pressure on the yen and on other Asian energy-importing currencies to dominate through the year, barring a rapid resolution in the Gulf.

On the near-term direction of USD/JPY, ING expects upside pressure to persist. A steady dollar through the current quarter, combined with the prospect of a hawkish Federal Reserve, keeps the pair biased higher. ING sees USD/JPY challenging its 2024 peak of 162, with an outside risk that Japanese authorities hold off intervening until the 165 area in order to maximise the impact.

That intervention calculus is complicated by positioning. The 2024 episode, in which Japanese authorities sold around 100 billion dollars to trigger a major short squeeze, was effective in part because speculative yen short positions were extremely large. Today those shorts are roughly half the size, which ING argues will limit both the effectiveness and the timing of any future intervention.

With negative real yields, a worsening terms-of-trade backdrop and policymakers appearing hesitant to act, ING concludes the yen offers little attraction for currency investors. The fact that it remains cheap to hedge makes it easy for equity investors to sidestep the currency risk, but that dynamic itself reflects just how little confidence markets have in a yen recovery.