15 July 2024
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The JPY climbed more than 2% against the USD on 11 July in the wake of softer-than-expected US CPI inflation, prompting a new round of market debate over FX intervention (Bloomberg, 11 July 2024). Japan’s vice finance minister, Masato Kanda, said that recent moves in the JPY are not reflecting fundamentals and the government generally does not comment on whether it intervened in FX markets (Bloomberg, 11 July 2024). Beyond this sudden move, the JPY has remained stubbornly weak against the USD for the following three key reasons, in our view:
1. A reluctant Bank of Japan (BoJ): Base pay for full time workers in Japan is growing at its fastest pace in decades in May (Chart 1). But as inflation has passed its peak and consumption is weak, markets doubt if the BoJ will raise rates decisively. Rates markets are currently pricing in a hike to 25bp only by October 2024 (Bloomberg, 11 July 2024), while our economists have a non-consensus view of a BoJ hike on 31 July. For bond purchases, a Bloomberg survey published on 26 June suggests that most analysts expect the BoJ to reduce its monthly government bond purchases modestly to around JPY5-5.5trn (from the current JPY6trn).
2. Unsupportive balance of payments (BoP): Japan was running a monthly trade deficit of USD4.2bn on average in the period of January to May 2024; similar to its 2023 monthly average of USD4bn. Further narrowing of the trade deficit would probably require a large decline in oil imports and/or a recovery in exports. At the same time, foreign income earned by Japan residents is at a record high level, as indicated by the primary income surplus (Jan-May monthly average: USD23bn; 2023: USD21bn). Residents are also trying to accumulate more foreign assets via outward direct investments (January-May monthly average: USD15bn), or via the purchase of foreign bonds (January-May monthly average: USD9bn), while aggregate data suggests residents as a whole did not make net outward portfolio equity investments in January-May (CEIC, 5 July 2024).
3. Speculation. Commodity Futures Trading Commission (CFTC) data indicates that speculative selling of JPY had rebounded to extreme levels as of 2 July (Chart 2).
Source: Bloomberg, HSBC (*Japan's core CPI refers to the consumer
price index that excludes both fresh food and energy items)
Source: CFTC, Bloomberg, HSBC
Until the Federal Reserve (Fed) cuts rates, it may fall upon Japan’s Ministry of Finance to put some friction in the upward momentum of USD-JPY.
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