MUFG: The JPY - FJElite

The yen has failed to benefit so far from the ongoing drop in energy prices with USD/JPY continuing to trade above 160.00 ahead of this week’s BoJ policy meeting. Prior to the Middle East conflict. USD/JPY was trading lower at closer to the 156.00- level. The US-lran deal through lower energy prices could help to ease yen selling. The latest IMM report revealed that leveraged funds have significantly increased short yen positions since the conflict started. Short yen position increased for the fifth consecutive week to 9,h June and have increased by almost four times since late February reaching. It is the largest short yen position since the start of July 2024 which was then followed by the heavy liquidation of yen-funded carry trades in the summer of 2024 after the BoJ hiked rates in July 2024 and the Fed cut rates in September.

The BoJ is expected to raise rates again this week but another Fed rate cut appears unlikely until the end of this year at the earliest. Japanese media reports last week set the stage for the BoJ to hike rates by 25bps this week, and indicated that the BoJ is considering pausing QE tapering from FY2027. A 25bps hike is already fully priced in so is unlikely to trigger a reversal of yen weakness on its own thereby encouraging a further build-up of yen shorts recently. The updated rate guidance is likely to rock the boat either by sticking to a path for further gradual tightening. We expect another hike to be deliver by later this year. One potential source of market volatility will be press conference given that Deputy Governor Uchida will be stepping in for Governor Ueda who is ill. If the yen remains weak, it will keep pressure on Japan to intervene again to provide support. Intervention could prove more effective if energy prices continue to fall and Fed rate hike expectations are pared back.