J.P. Morgan Yen View, 160.00 Unlikely To Be Line In The Sand

The US bank weighs in the USD/JPY outlook, stating that 160.00 is unlikely to be a line in the sand. It also discusses background on MOF capacity for FX intervention, see below for more details:

J.P. Morgan: "If the MoF pulls the trigger, what would be expected from here? We can learn something from the experience of FX intervention in September/October 2022. First, 160 should not be seen as a “line in the sand.” We repeatedly said in our past note that as a member of the G7, every FX intervention by Japan’s MoF should comply with the G7 FX commitment which prohibits targeting of any specific FX rate levels. In the 2022 case, on September 22 the 1st intervention was conducted just after USD/JPY traded at 145.90 but the pair exceeded the 1st intervention level several weeks later and the MoF waited until USD/JPY reached 152 for the 2nd intervention. The USD weakness seen in recent days could make 160 seem top heavy and provide the MoF some relief. If it takes several weeks for USD/JPY to trade at a new high, even if USD/JPY breaks 160, the MoF could likely tolerate the level. In other words, as the speed of the change in FX rate and context is much more important for the MoF’s decision on intervention than any specific level, USD/JPY at 160 several weeks later would look different from USD/JPY 160 today.

Discussions about the MoF’s capacity for further JPY-buying intervention could be active again. When the MoF conducted JPY-buying in 2022, it amounted to JPY9 trillion in a total of three series of interventions (Sep 22, Oct 21 and Oct 24), and market participants actively discussed how much additional USD could be sold. Although some speculated “deposits” in Japan’s FX reserves as an effective limit of JPY-buying/FX-selling intervention, it was not the case. The MoF data shows that “deposits” of FX reserve was $0.136 trn as of end-August 2022 (before intervention) and $0.145 trn as of October (after intervention). Meanwhile, “securities” of FX reserves decreased to $0.962 trn as of end-October from $0.987 trn as of end-August, suggesting the MoF sold some securities to raise FX cash to be sold in the market.

Note that, as of end-March, Japan had $0.994 trn as “securities” and $0.155 trn as “deposits” in its official FX reserves. As policy, all of Japan’s FX reserves are held for potential funds for JPY-buying/FX selling intervention. Therefore, in theory, the MoF can use all reserves for FX intervention if it believes this is appropriate. In reality, however, it is highly unlikely that the MoF would conduct FX intervention until it runs out reserves, as due to the G7 commitment, FX intervention is an exceptional action meant to contain excess FX volatility in the short-term and the MoF should not have any intention to defend any specific level and/or reverse FX trends driven by fundamentals."