Japanese Yen: Fiscal unease and BoJ path – MUFG

MUFG’s Lee Hardman notes the Japanese Yen (JPY) has firmed slightly, pulling USD/JPY back from 162.18 to 161.68, as comments from Growth Strategy Minister Minoru Kiuichi attempt to calm fiscal worries. He highlights volatile long-end JGB trading, renewed concern over Japan’s multi‑year investment plans, heavy leveraged fund short Yen positioning, and expectations for a Bank of Japan (BoJ) rate hike by September supporting the Yen.

Fiscal signals, JGBs and BoJ outlook

"The yen has strengthened modestly overnight resulting in USD/JPY dropping back to a low of 161.68 after hitting a high of 162.18. The yen has derived some support from comments from Japan’s Growth Strategy Minister Minoru Kiuichi who stated that “there’s absolutely no truth to reports suggesting that the government is encouraging low interest rates as part of its fiscal expansion policy. If our intentions haven’t been accurately conveyed, we intend to make even greater efforts to promote the understanding”."

"However, Growth Strategy Minister Minoru Kiuichi has provided some clarification emphasizing that “it wasn’t a matter of intentionally including or omitting the term ‘fiscal consolidation’. I would like to reiterate that this is by no means intended to weaken fiscal discipline. Rather, I hope you will understand that we are clearly demonstrating fiscal sustainability in a more concrete and verifiable manner”."

"The backdrop for the yen was already challenging given the negative impact from the energy price shock and recently the hawkish shift in Fed policy communication. As a result, market participants increasingly view the yen as a one-way bet anticipating further weakness. Even if Japan intervenes again to support the yen, it is judged as unlikely to reverse the weakening trend unless there is a change in fundamentals as eident by the price action in late April/early May when Japan carried out record intervention."

"Overall, affected report is unlikely to change the BoJ’s view that stronger wage growth continues to support the case for further policy normalization. We expect the BoJ to deliver the next rate hike as soon as September providing more support for the yen."