Japan consider intervention with USDJPY near 160

The BoJ is considering market intervention as USD/JPY nears 160. Rising inflation risks and yen depreciation were key discussion points in the latest policy meeting, with potential rate hikes and adjustments to bond purchases on the table.

By Ahmed Azzam | @3zzamous | 24 June 2024

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  • Japan debates market intervention with USD/JPY near 160

  • Yen depreciation prompts calls for higher inflation outlook revision

  • Global inflation data from Canada, Australia, Japan, and the US to influence currency movements this week

BoJ considers rate hikes amid inflation concerns

The Bank of Japan (BoJ) deliberated potential adjustments to its monetary policy during its June 13-14 meeting, citing rising inflation risks. A key viewpoint suggested that if the April Outlook Report's economic and inflation forecasts materialize, the BoJ may raise the policy interest rate and adjust monetary accommodation accordingly.

Some board members expressed concerns about prices deviating upwards from the baseline scenario if recent cost increases are passed on to consumers. This prompted discussions on further policy adjustments from a risk management perspective. One member highlighted the growing upside risks to prices, noting that these risks have started to affect consumer sentiment. The member advocated for raising the policy interest rate "not too late" if deemed appropriate.

The impact of the yen's depreciation was also a focal point. One opinion suggested an upward revision to the inflation outlook, which would justify a higher risk-neutral policy interest rate. However, several members emphasized the importance of basing monetary policy on the overall picture of economic activity and prices rather than short-term foreign exchange fluctuations. They stressed that policy should be informed by trends in prices and wage developments.

Regarding asset purchases, there was a recommendation to reduce the purchase amount of Japanese government bonds (JGBs) to allow long-term interest rates to form more freely in financial markets. This reduction should be "sizeable" and "predictable," while ensuring flexibility to maintain stability in the JGB market.

Global inflation data to influence currencies

This week's critical inflation reports from Canada, Australia, Tokyo, and the US will be closely monitored. The minutes from the Bank of Canada's (BoC) June meeting revealed a decision to advance a rate cut due to significant progress in reducing inflation, suggesting caution for future cuts. Canada's CPI common has steadily declined, but any stalling could keep the BoC cautious.

Australia's monthly CPI data for May might show a slight decrease, but the readings have remained steady since last December, leaving the Reserve Bank of Australia (RBA) vigilant for further tightening. In Japan, Tokyo's core CPI is expected to tick up slightly, influenced by energy prices, while the BoJ considers the complex scenario of demand-led price pressures and cost-push inflation due to a weakening yen.

In the US, the PCE core price index is expected to rise by only 0.1% month-on-month in May, marking the smallest increase since November. This development suggests easing inflationary pressures, but the Federal Reserve remains cautious about making any decisions on interest rate cuts until more data is available.