Evidence is beginning to accumulate that the Bank of Japan will tighten its monetary policy in the next few weeks.
The yen has tumbled more than 12% against the dollar this year, disappointing many on Wall Street who have predicted it would rally as a hawkish Federal Reserve and dovish Bank of Japan swapped places, pushing USDJPY lower.
While the BOJ has taken a number of small steps toward tightening policy — giving 10-year bond yields more room to rise by watering down the definition of its 1% cap — these have so far failed to spur a sustained rally in the currency.
Pacific Investment Management Co., one of the largest bond funds, is buying the yen on a bet the Bank of Japan will be pressured into tightening monetary policy as inflation quickens.
The fund started building a long yen position when Japan’s currency weakened past 140 per dollar a few months ago.
“As we continue to see inflation in Japan rising and being steadily above their target, they will want to move in the direction of abandoning or changing their yield-curve control policies and eventually there might be a need for a hike,” said a fund representative last week in an interview in Singapore. Inflation in the US is coming down, and inflation in Japan is still elevated. Within our framework, that naturally creates a yen long.
In addition, former Fed vice chair Richard Clarida, said last month the BOJ may scrap its yield-curve control program before year-end if inflation proves stickier than expected. The central bank may also raise its short-term policy interest rate to 0% by early next year, from the current level of minus 0.1%, he wrote in a research note.
Another possible avenue of support for the yen may come through a further bout of intervention from the authorities, who started purchasing it in October last year after it weakened past 150 per dollar.
The Overall Recommendation is to sell USDJPY if the pair reaches 145,000. This will technically confirm the beginning of the downward reversal.
Take profit from USDJPY selling at the level of 137,000. Fix the loss at 153,000.