FX Intervention Props Up Yen But U.S./Japan Yield Differentials Grow Wider

Japanese officials threw a lifeline to the beleaguered yen Thursday, intervening to prop up domestic currency for the first time since 1998. The intervention was confirmed as USD/JPY approached Y146.00 after the BoJ kept its ultra-loose monetary policy settings unchanged.

• The BoJ's decision triggered some JPY volatility as prior comments from FX authorities pointed to heightened intervention risk. Spot USD/JPY kept climbing as Gov Kuroda reaffirmed the Bank's easing bias and signalled intention to stick with the current forward guidance for the next 2-3 years.
• Kuroda's presser was followed by a confirmation that officials were purchasing the yen to curb speculative one-sided moves. Japan's $1.17tn stockpile of FX reserves and a reverse repo agreement with the Fed provides potent ammunition to keep slowing yen decline.
• Still, there seems to be a consensus that the intervention is not enough to permanently reverse the depreciation trend, as the fundamental forces behind yen weakness remain in operation. The SNB's rate hike left the BoJ as the only central bank in the world with negative interest rates amidst the global wave of aggressive monetary tightening.
• On that note, Thursday saw U.S./Japan yield differentials widen by notable margins. 2-Year gap rose 8.5bp to 418bp, most since 2006; 10-Year spread grew 20.6bp to 348bp, most since 2002.
• Spot USD/JPY last trades flat at Y142.40. The round figure of Y140.00 and the 50-DMA at Y138.12 provide the initial layers of support. Bullish focus is on yesterday's peak/2.764 proj of the Aug 2 - 8 - 11 price swing at Y145.90/146.03.
• Japanese financial markets are closed today.

Fig. 1: U.S./Japan 2-Year vs. 10-Year Yield Spread (bp)

Source: MNI - Market News/Bloomberg