02.07.202414:01 Forex Analysis & Reviews: The yen pushes the government to the edge

If a weapon doesn't work, it needs to be changed. The government's verbal interventions haven't scared off the USD/JPY bulls. The pair kept reaching new 38-year highs. Parliamentary elections are scheduled for September in Japan, and if the Liberal Democratic Party doesn't find a solution to improve the standard of living, it may lose power. The devaluation of the yen is pushing the Prime Minister and his team to the edge.

Dynamics of the Japanese Yen

Finance Minister Shunichi Suzuki noted that exchange rates are set by the market, reflecting a complex combination of various factors such as inflation, current account balance, market sentiment, and speculative movements. The government continues to monitor Forex closely. However, there were so many hints of intervention before the official's speech that if the USD/JPY pair situation could have changed, it would have already done so. For now, nothing has changed.

Investors are guided by this principle, not reacting to verbal interventions and preparing for currency interventions. The higher the US dollar climbs, the more likely it is that Tokyo's official intervention in Forex will become a reality. If the Bank of Japan refrains from intervention and reduces the volume of asset purchases under QE from 6 trillion to 5-5.5 trillion yen at the July Board of Governors meeting, USD/JPY quotes risk soaring to 170. This opinion was expressed by Vanguard, one of the world's largest financial managers, with $1.3 trillion under management.

Kazuo Ueda and his colleagues need to act quickly. Inflation in Tokyo, a leading indicator of national consumer prices, has accelerated, pushing the BoJ to continue its monetary policy normalization cycle. If, at the end of July, the Bank of Japan drastically reduces its quantitative easing program and simultaneously raises the overnight rate, it will be a double blow to USD/JPY.

Tokyo Inflation Dynamics

The efforts of the Bank of Japan alone are not enough to break the upward trend of the US dollar against the yen. Politics come to the aid of the bulls. Donald Trump's victory in the debates with Joe Biden and the Supreme Court's decision to grant some immunity to the Republican has brought him closer to victory in the presidential election on November 4th. As a result, the yield on US bonds has increased, their spread with their counterparts from the Land of the Rising Sun has widened, and the USD/JPY quotations have continued to rise.

The situation could be changed by Jerome Powell's speech at the bankers' meeting in Sintra, Portugal, and the release of data on the US labor market for June. The Fed chairman's dovish rhetoric and disappointing employment statistics will weaken the US dollar's position.

Technically, on the daily chart, the USD/JPY uptrend shows no signs of slowing down. However, the bulls' inability to breach the resistance at 161.8 or a break below the support at 160.7 will increase the risks of a correction and provide grounds for selling.