USD/JPY rises approaching 152.00, the outlook is bullish

• USD/JPY rises to 152.00 following comments from BoJ Governor Kazuo Ueda.
• His views suggest that the BoJ is in no hurry to raise interest rates, which reduces the attractiveness of the Yen.
• Analysts are bullish on USD/JPY despite the threat of intervention, as interest rates between the US and Japan continue to diverge.

USD/JPY advances towards 151.90 on Tuesday. The latest move follows a speech by Bank of Japan (BoJ) Governor Kazuo Ueda in which he suggested that any future rise in interest rates – a key driver of the currency market – would depend largely on data. that they were received.

Before his comments, there were mixed views on the likelihood of the BoJ raising interest rates in the future. Some analysts saw more interest rate hikes on the horizon, given that core inflation in Japan has remained above the BoJ's target of 2.0% for 23 consecutive months.

Others have remained more circumspect, pointing to the fact that in Japan, where deflation has raged for decades, inflation is actually seen as something positive and to be encouraged.

In his speech, Kazuo Ueda seemed to agree with those who expect the BoJ to keep interest rates low indefinitely, by introducing doubts about the imminence of future increases.

Inflation remains below target, according to Ueda

According to Ueda, “trend inflation”, a somewhat delicate indicator that differs from official measures of headline and core inflation, remains below 2.0% and is likely to remain so for quite some time. Therefore, a change in BoJ policy would depend on this measure of inflation rising.

“If trend inflation accelerates towards our 2% inflation target, it will be possible to reduce the degree of monetary stimulus to some extent,” Kazuo Ueda said in his speech on Tuesday.

The two factors that the BoJ would monitor closely in relation to inflationary pressures would be wage inflation and services inflation, Ueda added.

USD/JPY reaches all-time highs

The USD/JPY pair has been trading at all-time highs due to the difference between the interest rates of both countries. In the US they exceed 5.0%, while in Japan they remain around 0.0%.

The difference is significant, as it favors the USD over the JPY, since investors can reap higher interest payments simply by parking their money in the US.

The effect of the divergence was evident in Japanese current account data released on Monday, which showed a lower-than-expected level of net inflows into Japan in February. A surplus of more than JPY 3 billion was expected, when in reality the figure was JPY 2.6 billion.

Doubts about the Federal Reserve's plans

The effect of interest rate divergence on USD/JPY has been compounded by changing monetary policy expectations in the US.

While the US Federal Reserve (Fed) expected to make three 0.25% interest rate cuts in 2024 earlier this year, the persistence of stubbornly high inflation has led many to doubt that this will happen. be like that.

Friday's strong US labor market data and the unexpected drop in the unemployment rate have further suggested that inflation is likely to remain persistent as more earning workers are also likely to continue spending.

A key macroeconomic release on this week's calendar will be the US Consumer Price Index (CPI) data, due out on Wednesday. If the data shows an increase above expectations, it will further reduce the likelihood that the Fed will cut interest rates as much as expected.

The persistence of higher US and lower Japanese interest rates is likely to maintain upward pressure on USD/JPY.

Fears of intervention

The case for USD/JPY is further complicated by the Japanese government and BoJ's habit of directly intervening in currency markets to support the Yen.

A quick glance at the charts will immediately suggest to the observer that the current level at 151.50 is a level that has rejected the price on multiple occasions in the past – both in 2022, 2023 and now again in 2024. This is not a coincidence.

Japanese authorities have repeatedly said they will not tolerate the yen weakening above this level as it hurts businesses. That is why they usually intervene around the 150-152 band to lower the exchange rate.

On Tuesday, Japanese Finance Minister Shunichi Suzuki said authorities would not rule out any measures to address excessive movements in the yen, repeating warnings made in his previous statements, according to TradingEconomics.

This has been interpreted by the markets as a verbal intervention. However, the risk of physical intervention increases if USD/JPY tests 152 or higher.

USD/JPY at 160, according to analysts

Strategists at Bank of America Merill Lynch (BofA) recently noted in a note that if fundamental data continues to show such a wide divergence in interest rates, USD/JPY is likely to rise beyond the intervention attempts of the authorities, and could reach 160 points.

However, this scenario would depend on the Fed scrapping its plans to cut interest rates in 2024, something that is not currently contemplated.

The combination of the BoJ refraining from raising interest rates in 2024 and the Fed delaying its plans to cut rates could continue to put upward pressure on the pair.

Analysts at Brown Brothers Harriman (BBH) reached a similar conclusion in a recent note, stating that “it is only a matter of time before USD/JPY rises.” They blame this on a combination of the BoJ's very gradual attempts to raise interest rates and the Fed's likely delay in interest rate cuts.

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