Japanese Yen: Yield focus and BoJ risks – MUFG

MUFG’s Derek Halpenny notes USD/JPY is broadly stable as Japanese Government Bond demand improves and crude Oil declines support lower JGB yields. He highlights stronger super-long JGB auction metrics and broader domestic buying. Halpenny argues that, given persistent inflation risks and a weak Yen, the Bank of Japan is very likely to hike in June, with around 19bps already priced.

Yen steady as JGB demand improves

"The evidence of improving underlying demand for JGBs at recent auctions is also evident in the flow data."

"It’s too soon to conclude that domestic buying of the long-end will pick up more consistently but there are early signs that underlying demand will improve."

"Given the current favourable risk backdrop globally, the improved prospects of some form of peace deal and the continued weakness of the yen, we see it as very likely that the BoJ will hike at the next meeting in June."

"So, with a June BoJ rate hike well priced, a hike is unlikely to be the catalyst for a sudden revival of the yen from current weak levels although it would certainly help curtail yen selling through the 160-level, especially given the credible threat of intervention."

"USD/JPY is close to unchanged, reflecting the general stability in foreign exchange bar the New Zealand dollar which is the top performing G10 currency today following the RBNZ meeting, which signalled the need for more rate hikes than previously thought and for action to come sooner – a rate hike at the next meeting in July is now very likely and close to fully priced."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)