When the government makes herculean efforts to lower the USD/JPY exchange rate, its leader’s attempt to pontificate on the advantages of a weak yen puts an end to those efforts. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Sanae Takaichi stressed the advantages of a weak yen.
- Carry traders are pushing USD/JPY quotes higher.
- The Bank of Japan is in no haste to lower rates.
- Long positions on the USD/JPY pair opened at 153 can be increased.
Weekly Fundamental Forecast for Yen
Japanese Prime Minister Sanae Takaichi’s remarks on the advantages of a weaker yen, particularly in terms of promoting exports amid high US tariffs, have prompted a resurgence in bullish sentiment among USD/JPY traders. The upward movement was so rapid that the prime minister was forced to defend her position. Takaichi said she did not say that a strong currency is bad and a weak currency is good. The head of government aims to build a strong economy with a stable yen exchange rate.
With a single speech, the prime minister buried the recent efforts of the Ministry of Finance to reverse the upward trend in the USD/JPY by hinting at coordinated currency interventions with the US. Japanese Finance Minister Satsuki Katayama called Sanae Takaichi’s speech nothing more than a theory. She said that the prime minister did not mean to express the government’s views. Unfortunately, these efforts failed to calm the market.
As the parliamentary elections loom, the Liberal Democratic Party’s high ratings add to the risk of investors returning to the Takaichi trade, when stocks are bought, and bonds and the yen are sold. This has led to an increase in the real yield on Japanese bonds and made the USD/JPY pair fundamentally overbought.
USDJPY Performance and US-Japan Real Rates Spread
Source: TradingView.
However, Japanese investors should repatriate capital to their home country in order to close the gap. They are in no hurry to do so, which allows carry traders to take advantage of the situation. They were attracted by the government’s dissatisfaction with the weak yen and rumors of coordinated currency interventions. When it became clear that the reality was worse than expected, carry traders sprang into action. They were selling the yen as a funding currency and buying the US dollar as a risky asset. As a result, USD/JPY quotes started to increase.
The Bank of Japan could eliminate the rate gap by accelerating the cycle of monetary tightening, and hawks insist on this decision. They argue that the BoJ is lagging behind the curve and that the fall in the yen and the rise in bond yields reflect fundamental factors. In particular, rising inflation expectations. Therefore, the central bank must act decisively.
However, Kazuo Ueda and most of his colleagues are concerned that a faster pace of tightening will fuel the surge in bond yields, increase the cost of servicing debt, and hamper the government’s efforts. Therefore, the Bank of Japan prefers words over action. However, hawkish rhetoric alone will unlikely convince USDJPY sellers.
Weekly USDJPY Trading Plan
The prime minister’s reckless rhetoric, increased activity among carry traders, the Takaichi trade, and the BoJ’s cautious stance are weakening the yen. This trend is likely to continue at least until the parliamentary elections. In this situation, long positions on the USD/JPY pair formed at 153 can be increased if the price consolidates above 156.3.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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