USD/JPY Forecast: MUFG Sees 156-159 as Japan Discloses Record July Intervention

MUFG expects the dollar to trade at 156-159 yen this week as Japan details July’s record intervention and traders weigh the odds of a December rate rise.

Japan bought a record ¥7.98 trillion in a single day to support the yen on 30 July, the Ministry of Finance disclosed on Monday. The US Dollar to Japanese Yen exchange rate was priced at 158.36 on Monday, within half a yen of the previous week’s high of 158.76.

The ministry’s quarterly breakdown shows how heavily Japan concentrated its dollar sales. It bought another ¥5.55 trillion on 31 July and ¥1.87 trillion on 3 August. The first day accounted for over half the ¥15.40 trillion spent that quarter. The ministry specified no exchange rate that would trigger another purchase.

MUFG’s Tokyo head of global markets research, Teppei Ino, expects the dollar to trade between 156 and 159 yen this week. His forecast first appeared in Japanese on Friday, before the US jobs report and Monday’s intervention disclosure. The English translation appeared on 9 November.

“The US stance against further yen weakness is unlikely to change materially after the midterm elections. The current environment therefore offers little incentive to take on fresh short-yen risk. We continue to think the USD/JPY will struggle to break above its recent highs above 158.50.”

US hiring revives the case for a December Fed rise

Last week’s trading showed how quickly the dollar could lose ground above 158. Ino wrote: “From European trading on 3 November, strong US economic data added to dollar buying and yen selling, pushing the pair to a weekly high of 158.76. The vote count progressed during Tokyo trading on 4 November, and dollar selling intensified as Democrats secured majorities in both the House and Senate, briefly sending the USD/JPY to below 157.50.”

Thursday’s semiconductor sell-off pushed the dollar below 157.50 again. Ino noted: “However, safe-haven demand for the dollar limited the decline in the USD/JPY.”

Friday’s US payrolls figures gave investors another reason to hold dollars. US payrolls rose by 165,000 in October, including 159,000 private-sector jobs. Revisions added 84,000 to the combined August and September totals. MUFG senior currency analyst Lee Hardman set out the change in the pace of hiring on Monday.

“There has been a clear pick-up in employment growth over the last three months which has averaged 137k/month compared to only 28k/month in the prior three months.”

Hardman argues that a growing labour force has eased wage pressure despite faster hiring. He wrote: “Stronger employment growth has been offset by a pick-up in the labour force preventing a tightening of labour market conditions. At the same time, average hourly earnings growth continues to remain close to year-to-date lows on an annual basis at 3.1% despite the stronger monthly reading of 0.4% in October.”

Markets priced in around 20 basis points of Fed tightening for December after the report, according to Hardman. Tuesday’s US consumer price figures could decide how much of that survives. He also saw a risk to the dollar from Wall Street: “The main risk of delay would be if US financial conditions continued to tighten significantly heading into year-end triggered by a deeper sell-off in AI-related investments.”

Japan’s policymakers weigh the cost of waiting

The Bank of Japan held its policy rate at 1.25% in October, while judging that underlying inflation had reached a level consistent with its 2% target. Its Summary of Opinions, due on Tuesday, should show how long board members want to assess the impact of earlier increases before voting for another.

Japan’s factory prices offer one reason to consider raising rates sooner. “We expect October domestic corporate goods prices to rise +0.3% mom, the first rise in three months. This would convert to +6.6% yoy, slightly decelerating from +6.8% in September,” wrote Goldman Sachs economists Yuriko Tanaka and Tomohiro Ota.

Goldman found that special payments accounted for much of September’s unusually strong earnings growth. “Nominal cash wage growth accelerated sharply to +4.6% yoy in September, from +3.9% in August (market consensus: +3.8%). Overall basic wage growth printed at +3.7% yoy (August: +3.8%). Meanwhile, special wages increased by +32.6%, pushing up the overall print by +1 pp.”

What this means for USD/JPY

Ino expects competing views at the BoJ to matter for the yen well before the December vote. “The recent equity selloff has already prompted some market participants to question whether the BOJ will raise rates in December, with market pricing for a hike falling to around 50%.”

Thursday brings a speech by board member Toichiro Asada, who opposed the September rate increase. “Asada, who identifies with the reflationist camp, could reinforce the growing view that the BOJ may hold rates again in December. That would likely increase yen selling pressure against the dollar.”

A cautious message from Asada would carry more weight for USD/JPY if Tuesday’s US inflation release also reinforced expectations of a Fed increase. That would favour another test of 158.76. A soft US reading would leave less support for the dollar, particularly if the BoJ discussion shows wider backing for an increase in Japanese rates.