USD/JPY is in a firm-up trend but could we finally see signs of a reversal? Our view in the enclosed article...

“Prime Minister Fumio Kishida’s falling popularity adds to the risk that the Bank of Japan may surprise investors again with a policy shift that will make voters happier. Political distress has emerged as a potential leading indicator for action in monetary and currency affairs since late 2022. When Japan intervened to prop up the yen in October, it wasn’t just the currency that was falling — Kishida’s administration’s approval rating was also plumbing new lows.” (ZEROHEDGE)

A measure of the yen's strength against a basket of major currencies is nearing a 53-year low, forcing Japanese businesses and households to pay more for imported necessities such as fuel energy and food. "The burden on those with low incomes in particular is comparatively heavy," (Mizuho Research senior economist Saisuke Sakai.)

Declining Terms of Trade

Though a weak yen boosts exports, Japan's exports have been falling as the global economy slows up. Also Japanese companies handled 26% of their production overseas in fiscal 2021, roughly double the share two decades earlier. Higher imports and declining exports have led to a 48% drop in Japan's terms of trade -- the ratio of export prices to import prices -- since April 1995. This means more money flows overseas, which tends to lead to a weaker yen.

Inflation Rising in Japan

The problem is inflation is still firm and well above the 2% target rate of the BoJ and set to rise and passed US inflation in June: "With inflation on top of a labor shortage, companies will be forced to take action to improve productivity." (Naruhisa Nakagawa, chief investment officer at Caygan Capital)

Outside of core inflation if we look at energy crude oil has moved to the upside which is obviously inflationary and Japan is the third biggest importer of crude in the world.

Is Now the Time to Act?

While the central bank is independent of the Government when inflation gets to high there is a move to stop the JPY falling. Kazuo Ueda, who was chosen by Kishida to succeed Kuroda earlier this year, is concerned about excessive Yen weakness and surprised the market in July when he acknowledged that foreign exchange volatility had been a factor in raising the YCC cap. Could we see some action from the BoJ?

The Bank of Japan has to act soon in our view - Of all the forecasters we follow we dont find many Yen bulls so we have a bearish extreme and a major long position held by speculators so even without intervention we could see a big correction but intervention or another tweak to YCC could see a major JPY rally.

Lessons from Another Carry Trade

The one below is USD/MXN where traders built up a big short position based upon an attractive carry and this trade ended in a big way with no big fundamental obvious for the unwind part from traders were too short - could the same happen in the Yen? We think it could and short USD/JPY looks like an attractive risk-to-reward trade chart and comments from the TME below: 

Technical Analysis

Our view of the key levels of support and resistance to look out for are on the charts below.