MUFG: BOJ likely to raise rates next month, MOF under pressure to intervene

MUFG highlights the yen's recent weak trend and expects the Bank of Japan to raise interest rates at next month's meeting. At the same time, the Finance Ministry faces increasing pressure to intervene in currency markets to prevent the yen from further depreciating beyond critical levels.

the main points:

1. Yen weakness and intervention reversal:

   • The USD/JPY pair rose again above 159.00, approaching its year-to-date high of 160.17 since April.
   • The effect of Japanese intervention in late April and early May to support the yen has been almost completely reversed.

2. Yield Spread Dynamics:

   • Although the two-year yield gap between US and Japanese government bonds has narrowed from a peak of around 4.75% in April to a decline of 30 basis points, the yen continues to weaken.
   • Yield spreads remain at their widest levels since the late 1990s and early 2000s, and are insufficient to reverse the weak yen.

3. Pressure from the Ministry of Finance’s intervention:

   • The re-weakening of the yen increases the pressure on the Ministry of Finance to intervene again if the USD/JPY crosses the 160.00 level and the pace of the yen sell-off accelerates.
   • Previous interventions have had limited lasting impact, indicating the need for more substantive or coordinated efforts.

4. Bank of Japan policy normalization:

   • The weak yen also puts pressure on the Bank of Japan to accelerate its policy normalization process.
   • MUFG expects the Bank of Japan to raise interest rates by 15 basis points at its policy meeting next month.
   • In addition, the Bank of Japan is expected to announce detailed plans to slow the pace of purchases of Japanese government bonds over the next two years.

Conclusion:

MUFG expects the Bank of Japan to raise interest rates by 15 basis points at its next policy meeting and announce plans to reduce Japanese government purchases. At the same time, the Ministry of Finance may face increasing pressure to intervene in currency markets to prevent the yen from falling beyond critical levels, especially if the USD/JPY breaks the 160.00 level. The combination of the Bank of Japan's policy adjustments and potential interventions by the Ministry of Finance aims to stabilize the yen and address the continuing decline in the value of the currency.

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