USD/JPY has been a trade driven by fundamentals. It is something we have been discussing in this print for several months now.
The differential between the policy of the Federal Reserve and the Bank of Japan is stark. The carry trade is just as convincing as the moves seen.
Real yields are after all highly attractive for traders and USD/JPY has been one of the only pairs to trade on these fundamentals rather than event risks over the past 10 weeks.
However, there are signs now that from an economic level it has gone past a point of help. BoJ Governor Haruhiko Kuroda was verbally suggesting that the currency moves are now becoming more damaging to the economy than the positive impact it has on exports.
This should not be a surprise as USD/JPY hit a 20 year high of ¥129.40.
The conundrum for the BoJ, in particular, is that under their mandates they cannot step in and push the pair lower. It is also fair to say that current economic indicators in Japan such as inflation and activity are not high enough for the Board to move away from ultra-dovish settings.
The caveat here is that it could offer a more neutral or less dovish statement at its May meeting which could bring the JPY back to a more useful level. But that too would be domestically damaging as it will likely lead to confidence and spending interruption Japan still has yet to fix post-pandemic.
This puts the USD/JPY trade into jeopardy in our view – the long call may have finally reached its potential and with a view to risk mitigation, it might be time to acknowledge this and close.
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