MUFG reports rising downside risks for the Japanese yen as US yields rise and expectations of a Federal Reserve rate hike increase. The 10-year US Treasury yield rose 30bps since the start of last week, while the implied probability of a 25bp hike by year-end moved from 0% to about 80%.
Over the same period, the US Dollar Index (DXY) rose 1.5%, its biggest move since the early phase after the start of the US-Iran conflict. MUFG notes further upside risk for yields, which can add pressure to USD/JPY.
Intervention History And Yield Backdrop
The article compares past Japanese currency interventions in 2022 and July 2024, when US yields fell in the following weeks and USD/JPY dropped sharply. It also cites April/May 2024, when yields stayed elevated and intervention did not succeed.
It says external conditions are harder now because US yields are rising sharply, increasing the likelihood of further intervention. It adds that the Bank of Japan may adopt a more hawkish tone before its 16 June meeting, after comments that cost pass-through by firms is “somewhat fast”.
The article says markets already price an 80% chance of a hike, so further yen support may depend on factors such as the Middle East, energy markets, and US yields.
The dollar’s strength is dominating currency markets, pushing the USD/JPY pair towards the 162.50 level as we speak. This is a direct result of the U.S. 10-year Treasury yield climbing to around 4.85%, making dollar assets far more attractive. We see this trend continuing as the market now expects an 80% chance of a Federal Reserve rate hike by the end of the year.
We learned from the past that Japanese intervention to support the yen, like in 2022 and July 2024, only worked when U.S. yields were falling. The attempts in April and May of 2024 failed because yields remained high, and the current situation is even more challenging with yields actively rising. Therefore, any new intervention is likely to be a temporary fix at best.
Trading Implications And Key Drivers
Attention is turning to the Bank of Japan’s meeting on June 16th, where a more hawkish tone is expected. While the market has already priced in an 80% probability of a rate hike, such a small move will barely close the enormous interest rate gap with the U.S. For the yen to strengthen meaningfully, we would need to see clear signals of multiple future hikes, which seems unlikely for now.
For derivative traders, this outlook suggests positioning for further yen weakness. Buying USD/JPY call options could be a prudent way to capitalize on a potential move towards the 165 level, especially with intervention risk making spot positions volatile. This strategy allows for capturing upside gains while defining the maximum potential loss.
Ultimately, the yen’s path will be dictated by external forces, not domestic policy. We must keep a close watch on incoming U.S. inflation reports and developments in energy markets, as these will have the biggest impact on U.S. yields. Geopolitical events in the Middle East remain a key risk that could accelerate a flight to the safety of the U.S. dollar.
