Both the US and Japanese governments are seeking to place allies in key central bank positions to increase their influence. However, while Donald Trump has achieved limited success, Sanae Takaichi has been far more effective. Let’s discuss this topic and develop a trading plan for the USD/JPY pair.
The article covers the following subjects:
Major Takeaways
- The Japanese government wants to gain control over the BoJ.
- The Bank of Japan will raise rates in October or December.
- The Fed is poised to tighten policy in September.
- Consider short trades if the USDJPY pair falls below 161.45.
Weekly Fundamental Forecast for Yen
While Donald Trump openly pressures the Fed to cut rates, Sanae Takaichi has pursued a more discreet strategy. Despite backing the Bank of Japan’s tightening cycle in public, she has helped place dovish officials on the Board of Governors. One recent appointee, Toichiro Osada, voted against further tightening, raising concerns that the BoJ could slow the pace of normalization and support the ongoing USD/JPY rally.
The Board of Governors consists of nine members, and within the next 12 months, four of them could be supporters of Sanae Takaichi’s expansionary monetary and fiscal agenda. What Donald Trump has so far failed to achieve—gaining greater influence over the central bank—could become a reality in Japan under its prime minister. Growing concerns over the BoJ’s independence have emerged as another factor, pushing the USD/JPY pair to its strongest levels since 1986.
Expected Timing of the Next BoJ Rate Hike
Source: Bloomberg.
What can the Bank of Japan do in this situation? It needs to raise rates to a neutral level as quickly as possible, one that neither stimulates nor restrains the economy, before it’s too late and before the doves gain greater influence on the Board of Governors.
Deputy Governor Ryozo Himino’s message is becoming increasingly clear. He has warned that delaying monetary tightening could ultimately force the Bank of Japan to raise rates more aggressively, making the eventual adjustment more costly for the economy. Nevertheless, 52% of economists surveyed by Bloomberg expect the BoJ’s next rate hike to come only in December, while 36% see October as the most likely timing.
The BoJ’s cautious approach continues to weigh heavily on the yen. The wide interest rate gap with the Fed encourages capital to flow from Japan to the US, providing ongoing support for USD/JPY. The pair is drawing additional strength from market expectations that the Fed is not done tightening yet. According to derivatives pricing, investors see a 77% probability of a rate hike in September and a 59% chance of two additional rate increases before year-end.
USD/JPY and Japan’s Currency Interventions
Source: Bloomberg.
The government’s desire to maintain an accommodative monetary policy is increasingly constrained by the weakening yen. Further depreciation may fuel inflation, particularly as higher energy costs continue to feed into Japan’s core CPI. As a result, Tokyo may have little choice but to step up its efforts to bolster the currency through intervention.
However, the authorities face two major obstacles: the limited effectiveness of past interventions, which consumed roughly $73 billion, and the dollar’s strong underlying fundamentals. The market has largely shrugged off Finance Minister Satsuki Katayama’s warnings of decisive action. Had the latest warning come from Japan’s top currency diplomat, Atsushi Mimura, as it did in April, investors might have paid much closer attention.
Weekly USDJPY Trading Plan
Probably, currency interventions are on the horizon. If the USD/JPY pair drops below 161.45, short trades can be opened.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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