After a significant and somewhat unexpected decline at the end of last week, USD/JPY is attempting to resume its multi-month (since the beginning of 2021) upward trend on Monday.
First and foremost, the decline in the pair can be attributed to the sharp weakening of the dollar, especially on Friday after the ambiguous report from the U.S. Department of Labor with data for June.
The published report on the U.S. labor market prompts economists to revise their forecasts regarding the Fed's monetary policy tightening.
This week, market participants will be waiting for the release of fresh inflation data in the U.S. to have a clearer picture and make forecasts regarding the upcoming Fed meeting scheduled for July 25–26.
As for the yen and USD/JPY, the Bank of Japan's extremely accommodative monetary policy is preventing a more significant decline in the pair. The BoJ currently remains the only major central bank keeping its interest rate in negative territory.
This factor alone contributes to dollar buying against the cheaper yen through the so-called carry-trade strategy.
Bank of Japan Deputy Governor Shinichi Uchida recently stated that there is still a long way to go before the negative interest rate policy ends. According to him, the risk of failing to achieve the 2.0% inflation target due to premature tightening of monetary policy is higher than the risk of being late in tightening policy and allowing inflation to remain above 2%.
Considering the weak macroeconomic data coming from Japan and relatively low inflationary pressure, it is unlikely that there will be a change in the course of the Bank of Japan's ultra-loose monetary policy: although the year-on-year Consumer Price Index exceeded expectations in May, reaching 3.2%, above the Bank of Japan's 2% target level, it remains lower than the previous month's 3.5% and significantly below the 40-year peak of 4.1% observed earlier this year.
However, the Bank of Japan does not rule out the possibility of currency interventions to stabilize the exchange rate of the national currency in the event of excessive depreciation. Nevertheless, it will not have a decisive impact on changing or breaking the bullish trend of the USD/JPY pair.
The trend will likely continue, with short-term periods of correction, which we are currently observing.
Therefore, it would be appropriate to open new long positions near the support level of 142.40, as well as on price declines towards the support levels of 141.55, 141.00, 140.45.
An alternative scenario, associated with a more significant strengthening of the yen, is based on expectations of possible changes in the Bank of Japan's monetary policy parameters regarding yield curve control (YCC) at its meeting on July 28. Under this program, the Bank of Japan aims to keep the yield on 10-year Japanese government bonds (JGB) close to 0% to stimulate the economy. Whenever the market yield on JGB rises above the target range, the BoJ buys bonds to reduce the yield (which exerts negative pressure on the yen when JGB yield decreases).
In December 2022, the Bank of Japan doubled the upper limit for 10-year Japanese government bonds from 0.25% to 0.5%, expanding the range from zero in both directions by 0.5%, and accelerated bond purchases to defend the ceiling (yield). This resulted in a sharp strengthening of the yen and a decline in the USD/JPY pair.
If the Bank of Japan expands the yield range for JGB again at the July 28 meeting, as it did in December, we can expect a new wave of yen strengthening and a decline in the USD/JPY pair.
That's basically the reasoning behind the calculations of sellers in the USD/JPY pair. And the closer this date approaches, the stronger the volatility in the pair may grow.
Some economists believe that the Bank of Japan may completely abandon the yield curve control program as early as this year. It's easy to assume that even under the conditions of the Bank of Japan's low interest rate, this could lead to a significant strengthening of the yen.
